Despite what the name implies, mortgage protection insurance is almost never the best option for homeowners to protect their mortgage. It’s expensive, the death benefit decreases every year and it usually involves post-claim underwriting (which favors the insurance company). In this article, I will make my case for why I think should stop overpaying for mortgage protection insurance.
If you bought a home or refinanced your mortgage recently, you’ve probably received several official-looking letters and/or postcards about mortgage protection insurance. Actually, many of them are not that specific. Instead, they’re often designed to give the impression that there’s a problem with your mortgage.
Most of these communications look similar and are meant to make people think they came from their lender or a government program. Your name, address, mortgage account #, mortgage amount and lender are typically listed along with warnings of your family losing their home if you passed away unexpectedly.
Here’s an example of these cryptic tactics. I’ve personally received a letter that said:
“You have recently closed on your mortgage with ABC Home Loans, LLC. We need you to call us about an important matter regarding this loan. This is time sensitive so please call us at 866-123-4567 as soon as possible. Mortgage ID# 123456789″
At the bottom somewhere, there will usually be something in small print to the effect that the information is provided by a company that’s not affiliated with your lender. Since most people don’t read small print, they get a significant number of calls.
If you’re getting the impression that I don’t like mortgage protection insurance (aka mortgage life insurance), you’re absolutely right. It’s not just because of the sneaky tactics either. The coverage itself is inferior to what most people can obtain for significantly less money on the open market. I say “open market” because there’s no transparency into pricing with mortgage life insurance.
Drawbacks of mortgage protection insurance:
- Much more expensive than regular term
- No cost benefit if you’re healthy
- Death benefit shrinks every year
- Possibility of denied death claim
- Can only be used to pay off mortgage
Benefits of mortgage protection insurance:
- Could be an unhealthy person’s only option
- That’s about the only benefit…
Mortgage protection insurance does not take the borrower’s health into account, only the amount mortgaged. It functions similarly to guaranteed issue (GI), in the sense that anyone can get a policy. That being said, it doesn’t always payout the death benefit like GI does. More on that later.
Pricing appears to be based on the amount of death benefit (which is equal to the mortgage), the borrower’s age, build and whether they smoke or recently quit. Since rates aren’t published anywhere, it’s difficult to run comparisons for different scenarios. Speaking from personal experience, however, it’s not uncommon for someone to save upwards of $100 a month when switching to a regular term policy.
That’s better coverage, with a death benefit that doesn’t change, for potentially significant annual savings.
Confusing postcard language
No premium savings for good health
With traditional life insurance, your premiums are determined by your rate class. Also known as health class, it’s a rating system used by all life insurance companies to determine your level of risk, which is directly related to the premiums you’ll pay for coverage. Your rate class is based on your build (height & weight), your overall health and your lifestyle (i.e. dangerous sports/profession, speeding tickets, drug/alcohol abuse, criminal record, etc).
It’s common with life insurance for 2 people of the same age to pay significantly different premiums for the same level of coverage because of their rate class. The healthier person with no lifestyle red flags is considered a lower risk of dying and therefore rewarded with lower cost when buying insurance. This is not the case with mortgage protection insurance, however. Everyone gets the same rate. This can be advantageous to someone who isn’t healthy, but there’s still a risk if/when the time comes to file a death claim.
Dwindling death benefit
The amount of death benefit provided by mortgage life insurance declines annually in step with the mortgage balance shown on the amortization schedule. This is because this type of coverage is designed to pay off the balance at the time of the insured homeowner’s death. So, in essence, you get less every year as you continue to pay those expensive premiums.
Most mortgage life insurance policies involve post-claim underwriting. That’s potentially very bad. What this means is that since anyone can buy the coverage, the insurance companies protect themselves by verifying an insured’s eligibility after the fact. In other words, when a death claim is filed by the beneficiary, the underwriting department conducts a thorough investigation into the health & lifestyle of the insured. This includes findings from an autopsy.
If it’s determined that the person didn’t qualify for coverage, the claim is denied. Most policies have a return of premium clause where payments made are refunded in lieu of the death benefit.
Can only be used to pay off mortgage
Unlike regular term, universal and whole life insurance, mortgage life insurance can only pay off the insured’s mortgage balance. This is very limiting if the beneficiary has the ability to continue making mortgage payments and/or would prefer to sell the home and could use the funds elsewhere.
With Term, UL & WL policies, the beneficiary can use the money from the death benefit as they see fit. If there’s a concern that the funds won’t be used according to the insured’s wishes, a trust can always be established to receive the death benefit and disburse the money.
An unhealthy person can get a policy
One of the few advantages of mortgage life insurance is that if you have health issues you can still purchase coverage. That being said, there is the risk that post-claim underwriting will result in a declined claim. In reality, everyone “qualifies to pay” for this coverage, even though they may not qualify for the benefit when they die.
As I’m sure you’ve realized by now, mortgage protection insurance is very profitable for the companies that sell them. The premiums are high and there’s enough of a probably that the death benefit won’t have to be paid in a significant number of cases.
The average person will be miles ahead with a standard term policy. In most cases, it will be a fraction of the cost. The death benefit won’t change and can be used as the beneficiary sees fit.
It’s not uncommon for someone to save upwards of $100 a month when switching to a regular term policy.
Contact me if you are currently paying for mortgage protection insurance (aka mortgage life insurance) and would like to compare what your premium payments would be for better coverage.
-Danny Gallant, Life Insurance Broker
firstname.lastname@example.org | 512-922-1273