Hands down, buying a home can be one of the most exciting boxes to check off as an adult.
But, when you really think about it, it isn’t all gravy. It's easy to get burnt out by the host of new chores that you had probably never even imagined before, and there are likely to be some new financial worries that you’ll notice cropping up, too.
The biggie is more than likely something along the lines of this: What’s going to happen to my home and my family, if I’m no longer able to generate the income needed to make the mortgage payments?
If you’re a homeowner, chances are you’ve received a mailer urging you to complete and return a form in order to get your “mortgage protection card” or your “mortgage free home protection insurance”. Often times, these mailers are pretty vague, to the point where figuring out what’s really being offered to you might not be the easiest.
Mortgage protection insurance, also sometimes referred to as mortgage payment protection insurance, by definition, is life insurance that will pay off your mortgage if you unexpectedly pass away.
Sometimes, these policies also cover a portion or all of your mortgage payments in the event that you lose your job or become disabled. The thought behind it is to help make sure that your family is taken care of financially by paying off your home’s mortgage after you’re gone.
This might actually sound familiar to you, and if it does, that’s because this is a subcategory of another insurance product, known as credit life insurance.
Much like mortgage protection insurance, credit life insurance is intended to help if you unexpectedly lost your job, become disabled or pass away. The difference being that credit life insurance covers a personal loan or credit card payments rather than mortgage payments.
The cost of both mortgage protection insurance and credit life insurance will vary from person to person. Why?
It’s because the rate is based on several factors, including your age and health (for example, how do life insurers react if you smoke pot?, the amount of your regular payment, the current payoff amount of the mortgage or loan, and for mortgage protection insurance, the current value of your home.
Let’s dig in a little deeper.
You might not have considered home-buying to be related to estate planning, but you know how we just established that the rates for these types of policies are based on your age and health? Well, that’s because at the very core, these products are really just a type of life insurance.
However, with that being said, there’s a big difference between mortgage protection insurance and traditional life insurance. For mortgage protection insurance, the lender is both the policyholder and the beneficiary while you’re the insured.
What does this mean? To put it simply, even though you pay the premium, if the unexpected happens, mortgage protection insurance doesn’t pay an individual beneficiary.
Instead, the insurance company pays your lender to cover the outstanding amount left on your mortgage.
Mortgage protection insurance and credit life insurance are usually written as decreasing term insurance policies that provide a death benefit which decreases at a set rate over the life of the policy.
The rate at which the death benefit decreases is set to match the amortization schedule of the mortgage or the loan. Even though the premiums you pay are fixed, the value of the death benefit decreases as you repay your loan.
Like other types of insurance, the biggest upside to these policies is in knowing that your family will be financially protected to some degree if something were to happen to you.
If you have major health concerns or you have a high risk job, you might have found that it’s not easy to find a regular term life insurance policy that will cover you. With credit insurance and mortgage protection insurance, it isn’t very common for someone to be denied coverage.
Although age and health are taken into account when determining the policy’s rate, these policies typically have minimal underwriting and higher acceptance rates as compared to other term policies.
In some cases, it isn’t even required for blood work to be drawn or a medical exam to occur during the underwriting process.
While it seems nice that the death benefit is designed to match your loan amount, keep in mind that the premium amount that you’re paying each month doesn’t also decrease.
The premiums you pay for mortgage protection insurance stay the same, which means that the value of the policy dramatically decreases over time. On the other hand, level term policies, like Fabric Premium, have a fixed premium for a fixed payout.
Another important point to keep in mind is that the mortgage company or lender is the beneficiary of the policy, not a loved one. It’s true that a mortgage or a loan is probably among the expenses that your loved ones will be responsible for taking over once you’re gone, but there are other needs your family will likely have that should be taken into consideration.
A mortgage protection insurance policy will not be able to contribute towards burial costs, college education for a child, or replace lost income to help pay for ongoing expenses.
Like other types of term policies, the term lengths of mortgage protection and credit insurance are set. The common term length for a mortgage protection policy is 15 or 30 years, but these policy options may not be available to you after a certain age.
|Term life insurance||Mortgage protection insurance||Accidental death insurance|
|Set term length||Yes||Yes||Yes|
|Beneficiary||Your choice||The lender (aka the bank)||Your choice|
|Use of death benefit||No limitations||Mortgage repayment only||No limitations|
If you want to refinance your mortgage or if the bank sells your loan, remember, your mortgage protection insurance policy will have to be rewritten as well.
For those who may find it difficult to get life insurance because of their age or a pre-existing medical condition, mortgage protection insurance might be an option worth considering.
However, as a general rule of thumb, most financial professionals wouldn’t recommend mortgage protections insurance, or any insurance product that pays only certain bills. Because it can only be used for a single purpose, it’s often overpriced in relation to its benefits.
This is especially true for anyone who already has a traditional life insurance policy that can cover other obligations if something were to go wrong.
You might be asking yourself, is mortgage protection insurance mandatory? The answer: absolutely not. But, let’s say you decide that it might make sense for you to look into this type of insurance and you even go as far to get a mortgage protection insurance quote. Before you make any decisions, the FTC has put together a list of suggested questions to ask before you take the leap to buy credit insurance.
How much is mortgage protection insurance per month?
Will the mortgage protection insurance premium be financed as part of the loan? If the answer is yes, it will increase the loan amount and you’ll end up paying more interest.
Can I pay my mortgage protection insurance monthly instead of financing the entire premium as part of the loan?
How much lower would my monthly loan payment be without the mortgage protection insurance?
Will mortgage protection insurance cover the entire length and amount of my loan?
What are the limits and exclusions on payment of benefits for mortgage protection insurance?
Is there a waiting period before the mortgage protection insurance coverage goes into effect?
Can I have a co-borrower? If so, what mortgage protection insurance coverage will they have and at what cost?
Can I cancel the mortgage protection insurance policy? If so, can I get a portion of the premium refunded to me?1
1“Credit Insurance.” Consumer Information, 1 Sept. 2016, www.consumer.ftc.gov/articles/0110-credit-insurance.
Ultimately, whether or not you should consider buying this specific kind of life insurance, will depend on the amount of the loan, the value of your house, your age and health, and your family’s current financial situation. Make sure to read the fine print of any mortgage protection insurance policy you’re considering and understand exactly what is and isn’t covered by the policy.
Remember, your family will have many other financial needs to be met aside from just paying off your home or your loan, which is one reason why it isn’t a good fit for most people, and also the reason why term life insurance might be a better option.
One thing that you can do is to compare any quote you receive for credit insurance against a quote for a standard term life insurance policy such as Fabric Premium, our term life insurance policy that’s backed by the financial strength and claims-paying ability of Vantis Life Insurance Company (Established 1942 and rated “A” by A.M. Best).
If you have any questions about our policies, or about your specific situation, reach out to us through Support and we’ll connect you to chat with one of our licensed insurance agents.
This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific advice or to serve as the basis for any purchasing decisions.
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Fabric Instant is an Accidental Death Insurance Policy (Form VL-ADH1 with state variations where applicable) and Fabric Premium is a Term Life Insurance Policy (Form ICC16-VLT and CMP 0501 with state variations where applicable). Policies are issued by Vantis Life Insurance Company. (Vantis Life), Windsor, CT (all states except NY), and by Vantis Life Insurance Company of New York, Brewster, NY (NY only). Coverage may not be available in all states. Issuance of coverage for Fabric Premium is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Policy obligations are the sole responsibility of Vantis Life.