If you are a homeowner who recently closed on a loan or refinanced a mortgage, then it is likely that you have been inundated with offers for “Mortage Protection” or “Mortgage Life Insurance”. The letters appear official — as if they are sent by your lender — but in 9 out of 10 cases, they are not. Often times, your lender will partner with an insurance company and send out an offer for Mortgage Life Insurance, but these are far outnumbered by the others. At the bottom of the letter, there is a disclaimer stating that the loan information was obtained from public records. Anyone can obtain these records and in Georgia (especially Atlanta), there are numerous life insurance agencies marketing to homeowners.
What exactly is Mortgage Protection Life Insurance?
Basically, it is a life insurance policy designed to pay off the mortgage balance in the event of the death of the homeowner. Often times, the policy has a decreasing benefit (face) amount that decreases in direct proportion to the decreasing liability of the borrower. Sometimes, the lender is named the beneficiary of the policy to protect against loan default. More commonly, the policyholder names a spouse or someone else as beneficiary so that they can pay off the mortgage in one lump sum or continue making mortgage payments.
Many Mortgage Protection policies also offer riders (additional features) that include disability insurance and Return of Premium. The disability insurance benefit is designed to pay the m0nthly mortgage payment in the event of the homeowner’s disability — the inability to work due to injury or illness. The disability riders are not as strong as most disability insurance products, but that is another topic altogether. The Return of Premium (ROP) rider refunds the premium paid if benefits are not used by the end of the mortgage term (usually 30 years). It is important to read the fine print when selecting this rider because ROP riders vary considerably.
Most of what has been written about Mortgage Protection Insurance has been critical, however, these products can work for some people as described below. What I really like is that these offers send out a good message – a needed reminder – that your mortgage is a very large debt and adequate life insurance coverage is needed to protect your loved ones.
The Bottom Line:
Mortgage Protection Life Insurance is not a good deal for the vast majority of people. The rates tend to be substantially higher than level term insurance products. A good, low-cost 20 or 30-year term policy will provide the protection one needs (Term Quotes available at www.insuranceadv.com). Life insurance carriers will allow the face amount of the policy to be lowered by the policyowner as desired. This can be helpful as the need for life insurance decreases over time (as the mortgage and other debts dwindle). Periodically lowering the face amount can also save money spent on premiums. For more information on this strategy, see laddering life insurance post.
Mortgage Protection is just a neatly packaged way to offer life insuance. Some would say it is gimmicky and in some cases they are right. The offer received in the mail can sometimes be misleading. However, there are many agents who market to new homeowners, recognizing their potential need for additional protection. And sometimes they offer legitimate products that can serve the homeowner well.
Why does Mortgage Protection cost so much?
For those who want to know precisely why Mortgage Protection Insurance costs more than level term insurance, the following explanation should suffice.
Mortgage Protection Life Insurance is typically sold as a “Non-Medical” product. Non-medical means that no physical exam (blood,urine samples, etc.) is needed to qualify. The insurance company makes the application process simple and quick by asking a limited number of health questions. Mortgage Life Insurance is generally sold with just two undewriting classifications: Standard Smoker and Standard Non-Smoker. Most companies offering medically underwritten term life insurance offer three or four Nonsmoker (NS)underwriting classifications, e.g. Standard NS, Standard Plus NS, Preferred NS, and Preferred Best NS. So, for someone in excellent health the rate for Preferred Best NS will be considerably less than Standard NS. For a non-smoker who may be overweight and taking medication for Hypertension, they might qualify for the Standard NS rate.
It wouldn’t make sense for a very healthy person (normal weight, and no medical issues) to apply for Mortgage Protection Life Insurance because they would be forced to pay the same rate as others who are less healthy. There are exceptions to this rule, but this is one reason why Mortgage Life Insurance isn’t a good option. If someone has health concerns and does not want to get a physical exam, then this could be the way to go. In that case, it would be best to check out the other Non-med life insurance products on the market.
If you have more specific questions, please comment below or email me: greg@insuranceadv.com or call 678-236-1600
