January 18th, 2016 6:39 AM by Jackie A. Graves, President
mortgage protection insurance? So many financial products contain the words
"mortgage" and "insurance" in their names that it's hard to
tell them apart. For example, there's private mortgage insurance and the
Federal Housing Administration's mortgage insurance premium. Even though you
may have to pay for them, both those only protect the lender in the event of
your defaulting. The only benefit they give you is that they allow you to
borrow when your mortgage application would otherwise be declined, often
because your down payment is lower than normally required.
protection insurance (sometimes called mortgage payment protection insurance)
is different, and provides you with potentially valuable benefits. It can cover
your monthly payments when you lose your job or while you're unable to work
through illness or disability. And it can zero your mortgage balance on your
death, leaving those you love (or, at least, the beneficiaries of your estate)
with a home unencumbered by that debt.
If there's one thing that, for many,
slightly takes the shine off buying a new home, it's the small but nagging fear
of being engulfed by just such a personal disaster. So it's no surprise that
home owners are often bombarded with mortgage protection insurance offers soon
after purchasing or refinancing. And, for some, the premiums
required for peace of mind are a price well worth paying.
with all non-mandatory insurance, it's important to balance the cost of cover
with the risks protected. It's also important to recognize that the insurer is
making precisely the same calculation: it's going to set premiums that reflect
the chances of you personally making a claim. So if you're older, in poor
health, or work in a job that carries a high risk of being laid off or of
injury, illness or disability, you may find it prohibitively expensive to
obtain the coverage you want. If you're young, fit and in a safe job, you may
be able to afford the policy's costs, but you may calculate that you don't need
the protections it provides.
You should also recognize the nature of the
benefits provided, in particular, that they're tied to your mortgage.
That means that the value of the coverage in the event of your death is going
to reduce as you pay down your mortgage. Suppose you're age 40 now and have
just bought a home with a $200,000, 30-year fixed-rate mortgage. The chances of
your dying now and your estate getting the full $200,000 are relatively small.
The chances of your dying toward the end of the loan term, when you're
approaching 70 years of age, are much greater. But by then you'll have paid
down nearly all you owe, so your estate may benefit by only a few thousand
the prospect of finding your monthly payments during a spell of unemployment or
sickness now may fill you with horror. But by the time you're most likely to
make a claim, after 20 or 30 years of saving, and rising salaries and home
prices, those payments may look a lot less scary.
all insurance involves pooling risk, and only works because most policyholders
don't make claims. Mortgage protection insurance is no different in that
the same in that you need to understand the coverage provided. In particular,
there excesses/deductibles that mean my coverage kicks in only after my losses
reach a certain level?
there caps on the total I can claim for certain risks?
my monthly payments going to be paid in full by the insurer if I'm sick,
disabled or unemployed, or will I still have to find some money?
there exclusions that might limit my coverage if my circumstances alter? For
example, what happens if I change careers and begin to work in a higher-risk
category of job?
Even if you're happy the coverage matches
your need, you still need to make sure you're getting the best possible deal.
You shopped around for your home. You probably shopped around for your mortgage
(see How Much Shopping Around for a Mortgage Can Save You),
now you need to shop around for your mortgage protection insurance.
experts suggest doing this within the context of a wider financial review,
which might throw up alternatives to this type of insurance. Again there are
questions you could ask yourself:
a life policy, which maintains its value throughout its term, be a better bet
there better-value forms of insurance that would cover me more cheaply for
unemployment, sickness and disability?
building up a worthwhile emergency fund, partly using the money that would
otherwise go into premiums, provide as good and more flexible coverage for
Might I eventually (when my risk is highest)
be able to use the equity I build in my home to see me through many of these
sorts of difficult times – perhaps using a home
equity line of credit or reverse
answering those, you could well still reach the conclusion that mortgage
protection insurance is your best bet. You should then compare different
policies from different insurers to make sure you're achieving the optimum
premium/coverage ratio for your needs. This will take some effort, but you're
making a long-term – maybe three-decade long – commitment when you sign up for
one of these policies. And, over such periods, even small monthly savings
really do add up.
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