| Is mortgage life
or disability insurance right for you and, if so, how much coverage
do you need? Here are some questions to ask yourself and/or
the potential insurer: |
| QUESTION |
ANSWER
|
|
1. Do you already have life or disability
insurance through work or an independent company? If so, is
it enough to pay off your mortgage or make your monthly payment?
|
Borrowers may not need additional
coverage designed specifically to pay off their mortgages if
they already have standard term life insurance or supplemental
disability insurance through their employers or outside agents.
Regular life insurance benefits often are enough to allow surviving
families or spouses to pay off any outstanding loans. Standard
disability coverage provides a monthly benefit to borrowers
who become injured and can't work. If that's enough to cover
the homeowner's monthly principal, interest, tax and insurance
payment, then mortgage disability coverage is a waste of money. |
|
2. Are you a relatively healthy individual
whose family doesn't have a history of medical problems?
|
This is important because healthy
borrowers can often get more and better coverage for less money
through a regular life insurance company rather than one that
just sells mortgage life policies. Nonsmokers, young consumers
and those with no history of heart disease, cancer or diabetes
are the most apt to benefit by buying standard term coverage
rather than mortgage life. |
|
3. What kind of mortgage life insurance
do you want -- "decreasing term" coverage, where the benefit
paid out at death declines along with the balance of the mortgage;
or "level term" coverage, where it stays constant?
|
Decreasing term might be cheaper,
but it might also be designed to pay just the mortgage off and
nothing else. That can leave a surviving family responsible
for the cost of selling a home that's no longer needed or stick
a surviving spouse with relocation expenses should he or she
want to start a new life somewhere else. If it's affordable,
term life might be the better option. |
|
4. If you choose decreasing term coverage,
by what schedule does the benefit decline?
|
Be sure you understand how your benefit
decreases if you go with this kind of insurance. The benefit
on a straight-line decreasing policy usually will drop the same
amount every year until the loan is retired, while the benefit
on an amortizing policy will shrink in lock step with the payoff
balance of the loan. Because the majority of each payment made
during the early years of a home loan goes toward interest rather
than principal, straight-line coverage can leave a surviving
spouse responsible for part of the mortgage. For instance, a
consumer with a 30-year fixed-rate loan for $150,000 still owes
about $91,900 in principal after 20 years, assuming an 8.25
percent interest rate. If the policy benefit decreased in a
straight line, or $5,000 a year for 30 years, it would have
shrunk to $50,000 by that point in time. |
|
5. Have you gotten any equity loans
or lines of credit since you took out the original mortgage?
|
If the answer is "Yes," then you
may want to increase your current coverage or consider purchasing
some if you don't have any already. Somebody with only $50,000
left on a first mortgage against a house worth $100,000 isn't
sticking the surviving family with a big hassle. Almost invariably,
they'll be able to recoup the cost of selling the property and
have money left over to settle other affairs. But if that same
owner had taken out a $45,000 equity loan just before passing
away, the story would be different, especially if home values
in the neighborhood were declining. |
|
6. Did your lender attempt to roll
mortgage life insurance into the loan balance at closing,
or try to make you purchase the coverage as a condition of
getting the mortgage?
|
Above all else, consumers should
know they don't have to buy mortgage life insurance to get a
loan in all but the most extreme cases of poor borrower credit.
If a lender insists on it, then you're probably getting a raw
deal and you should consider taking your business elsewhere. |
