Taking out a mortgage can be a scary proposition. Now imagine if the principal breadwinner dies. How will you make the payments?
Mortgage protection insurance covers this potential financial disaster. You can purchase a policy when you first buy your home, or later if you think your situation warrants it.
The idea behind mortgage protection insurance is straightforward: You pay a premium, which remains the same for the duration of the policy. If you die during that time, the insurance pays off the rest of your mortgage. The borrower pays for the coverage, but if the loan is defaulted, the lender is the policy's beneficiary.
How is it priced?
Insurers take age, whether the applicant is a smoker or non-smoker, and the value of the death benefits into account.
A policy covering a mortgage of $100,000 will cost about $50 a month for a 40-year old non-smoker, depending on what state you live in.
The "death benefit" in this case is the outstanding balance on your mortgage. So, if you take out a large mortgage initially, your premiums will be higher.
As you pay your mortgage off, the amount your policy pays off goes down. Even so, your policy premiums remain the same because the payments have been calculated with the decreasing death benefit in mind.
If you make extra payments on your mortgage, your family could receive some of the money from a mortgage insurance claim. The death benefit remains the amount your mortgage would be , if you were only making the required payments. This means after the mortgage is paid off, your family would receive the remaining death benefit.
While policies vary from one insurance company to another, if you should default on your mortgage, most insurers will extend your coverage for a grace period.
If you refinance your mortgage, you can usually get your mortgage protection policy reissued at a more favorable premium.
One type of mortgage protection insurance provides joint coverage for you and your spouse. This means the policy pays off when either of you dies. The pricing can be more advantageous than what you'd pay for two individual term life policies.
Alternatives to mortgage protection insurance
A downside to mortgage protection coverage is the death benefit pays only your mortgage balance, and perhaps a bit more if you were ahead on your mortgage payments. With a term life insurance policy; however, your beneficiaries have much more flexibility.
Finding a term life policy to cover only a mortgage below $100,000 can be difficult, as few term life policies are available for such a low benefit.
Don't confuse Mortgage Protection with Private Mortgage Insurance If you've purchased a home with less than 20 percent down, your lender probably required you to purchase "Private Mortgage Insurance" or PMI.
While Mortgage Protection Insurance will pay off your loan when you die, Private Mortgage Insurance only covers a portion of your loan if you default. PMI is designed to reduce the risk faced by lenders, when homebuyers have less than 20 percent for a down payment. As the Mortgage Insurance Guarantee Corporation points out, " Unfortunately, some people continue to confuse private mortgage insurance with mortgage life insurance. Private mortgage insurance puts people in homes; mortgage life insurance pays all or a portion of your mortgage in the event of your death."
PMI might make it easier for you to get a loan, but you need Mortgage Protection or another form of life insurance to guarantee your loan is paid off should you die prematurely.
Source: Insurance
