Who really benefits from mortgage life insurance?
They come more
often than invitations for new, low-rate gold credit cards. Most
proclaim dire consequences if the recipient doesn't respond within
30 days and some originate from the same company that holds the
But the mailers aren't as urgent as consumers
might think. They are actually solicitations from banks, insurance
companies and third-party agents who want to sell mortgage life
and disability insurance.
mortgage insurance, which is required on low down payment loans
and pays the lender in cases of default, the coverage pays benefits
to a consumer's spouse, estate or lender in the event of death,
disability or disease.
Unfortunately for borrowers who take the bait
on mortgage life or disability insurance, though, the coverage often
doesn't measure up to what's available elsewhere, according to lending
and insurance experts. Homeowners can generally get a better deal
by analyzing their overall needs and obtaining general life or disability
policies rather than targeted mortgage ones.
"When I go in and do a financial plan for them,
I'm certainly asking them, 'Do you want the mortgage paid or not?'
" says Dennis Merideth, a chartered financial consultant and associate
general manager with Principal
Financial Group in Tucson, Ariz.
"But I'm finding a need for total coverage and
asking, 'If you don't come home tomorrow, if you wanted the house
paid off and you wanted to pay for the children's education, then
how much total liquidity, how much total insurance money would you
product during the early '70s
Mortgage life and mortgage disability insurance have been around
for many years, but really came into their own during the early
1970s, according to Patricia Borowski, division vice president at
Association of Professional Insurance Agents in Alexandria,
Va. Consumers who were taking on larger mortgages didn't want their
spouses left holding the bag if disaster struck. Lenders wanted
to avoid defaults and foreclosures. Insurance companies wanted to
make more money, and they responded by developing and heavily marketing
life and disability policies specifically designed for homeowners.
"When it was first sold in the form of life
insurance, where it paid off the entire mortgage, it certainly impressed
people with the benefit," Borowski says.
Over time, many independent agents stopped selling
mortgage insurance. But others realized that by pitching the coverage,
they could get a foot in the door with individuals who had at least
enough money to buy and support a home. Mortgage lenders and servicers
joined the fray, too, soliciting their own borrowers with products
sold by insurance company partners. The end result has been cluttered
kitchen tables and confused consumers across the country.
through the options
So how do borrowers sort through their options? They should
start by realizing that all policies operate on the same basic principles.
Mortgage life protects a deceased debtor's survivors by paying off
the home loan. Disability insurance keeps an injured consumer from
having to make the monthly mortgage payment when paychecks aren't
Here are some examples from Farmers
Insurance, a Los Angeles-based division of Zurich
Financial Services Group. A consumer's actual bill can
vary by insurance provider, age, sex, loan type, loan amount,
health status and other factors, so borrowers should shop
around for coverage.
This price comparison is for a 24-year-old male nonsmoker
with a 15-year mortgage of $105,000 at 7.25 percent.
Decreasing Term/Benefit (follows loan amortization)
Level Term/Benefit (no 15-year policy offered, so 20-year
Level Term/Benefit (no 15-year policy offered, so 20-year
Super-Preferred (insured must have no personal history of
heart disease, cancer or diabetes, a cholesterol rating of
less than 275 and meet other health standards)
$158.15 for 15 years
But the coverage varies widely from policy to
policy and company to company. Some mortgage life insurance pays
the exact loan balance directly to the lender after the policyholder's
death. These "decreasing term policies" start out having a benefit
of, say, $100,000 on a $100,000 loan. But as the loan is paid down,
the benefit amortizes right alongside. That means the spouse of
someone who gets a 30-year fixed-rate mortgage today and dies 25
years later receives only about $36,700.
Other life policies feature benefits that stay
fixed throughout the term, regardless of the mortgage balance. Many
pay that benefit money directly to the estate or family, too, giving
beneficiaries extra cash to pay off home-selling costs, equity loans
against the property or other expenses. Borrowers also can insure
just a portion of the balance.
Disability insurance can be structured in many ways as well.
Some policies pay a fixed amount equal to the loan's principal and
interest only, leaving consumers liable for the tax and insurance
escrow part of the monthly payment. Others are subordinated to any
disability coverage the borrower might have through work. That means
someone with a $1,400 loan payment and a separate disability policy
for $500 a month might only get $900 from the mortgage life insurer.
"There's no particular rule that says the mortgage
insurance must be exactly greater or less than the loan," says Don
McLaughlin, life sales analyst with Erie
Indemnity Co. of Erie, Pa. The company sells policies through
agents in the mid-Atlantic states and Midwest. "We have people who
can only insure part of the debt. Some people insure the debt and
income, and the beneficiary of this type of contract is the family,
not the bank. The family then has the choice of paying off the debt.
"Different products are designed with different
features in mind for different circumstances."
apples to oranges
That makes mortgage life and disability insurance tricky to
shop for, because one quoted rate may be for a different policy
than another. But that's not what concerns insurance and lending
experts about mortgage life and disability coverage the most. They
worry that borrowers, who in many cases would be better off with
generic term life or disability insurance, just go with whatever
their mortgage holder pitches.
"The seller of such coverage is essentially
'recommending' the amount of insurance coverage you have being equal
to your mortgage debt," says Eric Tyson, author of Mortgages
for Dummies, in an e-mail interview. "This is self-serving on
the part of the mortgage lender, which generally sells such policies."
"Their concern is not having defaults when a
homeowner passes away," he adds. "It's a high profit, easy sale
for the lender that protects their interests!"
you say, you're healthy?
Healthy borrowers should be especially wary of mortgage life
insurance. They can almost always get better rates on regular life
insurance policies because such policies feature tiered premiums,
with the healthiest consumers paying the least. Most mortgage life
policies, by comparison, don't have that option.
"The thing with the company policies is they
will issue the policies with very little or no medical underwriting,"
says Jerry Montgomery, associate director of curriculum at the National
Alliance for Insurance Education & Research. The Austin,
Tex.-based group runs training seminars and classes for insurance
"If you're living and breathing, they'll issue
that policy," he adds. "That's one advantage, but I've seen under
the mortgage policies, the rates are quite a bit more."
Because of all these variables, consumers should
do two things before signing up for any kind of mortgage insurance:
Decide whether they need coverage at all and figure out, if they
do, what kind gives them the most peace of mind for the least money.
"It may seem expedient just to buy something
through the mail, but for the most part that's not the best way
to go," says Merideth, the Principal Financial counselor. "They
need to review their entire situation."