Wednesday, August 26, 2020

What Is Mortgage Protection Life Insurance?

As a general agent for a life insurance company, I work with and recruit, agents from all over the country. Some sell life and health insurance products exclusively, while others also work in the property and casualty market as well. Discussing their insurance practices and learning what they do for their clients is always interesting to me. So you will understand why I wanted to do some asking when I kept hearing about "mortgage protection life". 

The problem was that every time I asked an agent about it, I would get a different answer, mostly because there are a few different kinds of policies. Some were actually selling "mortgage protection" insurance, which compensates the lender if the loan defaults. Not life insurance, but confusing because of the name. 

Next is Private Mortgage Insurance (PMI) which is a type of life insurance for conventional loans and arranged with a private company. It can increase your loan and is typically included in your total monthly payment. Typically it is required when someone purchasing a home puts down less than 20% of the home's purchase price. This policy protects the lender but you pay for it. The only real advantage to it is that it will allow you to make that home purchase if you don't have the 20% down payment.

Before the great recession of 2008, I considered selling PMI as part of my portfolio of products and asked a few agents I knew if it was worth their time. The answer was a resounding "no". Apparently people didn't like having to pay the premiums on a policy that would not benefit them. As home values were steadily increasing, the new homeowners would wait six months and having a new appraisal done on their houses. The values had increased in that short time and all of a sudden they had enough equity to drop the PMI coverage. 

Then there is "mortgage protection life insurance", which is designed to pay off the remainder of your mortgage if you were to die. Now this one actually is life insurance. In a nutshell, this is a decreasing term policy, which means the face amount of the policy decreases as the principle of decreases. 

You would think that a policy with a decreasing face amount would be a bargain. Unfortunately it isn't always. One of the problems is that these policies are not usually fully underwritten. There may be a minimal amount of health questions but for the most part you can be fairly unhealthy and still have a policy. This puts additional risk on the insurance company and they put that risk in your higher premiums.

Yet another problem is that the face amount decreases. And it won't coincide with in sync with the principle owed. Who wants that? Also, what if you refinance your policy and have to start another 20 or 30 mortgage? What a mess!

If you are a healthy person who does not use tobacco you are more than likely to be better off by purchasing a traditional life insurance policy to cover your mortgage. Because it is fully underwritten, your rate can be much lower. Who doesn't like lower premiums?

But the better part is that the face amount is level, which means you don't have to worry about getting less coverage as your policy continues. So if you were to die in year 3 or year 18 of a 20-year term policy, your family would receive the same amount. That extra money (assuming your family uses the bulk of the proceeds to pay off the note) could go for education costs or just replacing your lost income.

It took me several months to get this through the head of a new agent I met from Nashville. He had been working getting referrals from a local mortgage brokerage company and was afraid he would upset them if he didn't sell the decreasing term. Eventually he came around and found out that most of his clients would get a better deal with a traditional term life insurance policy. 

In the next post I'll go over some of the non-traditional policy terms we now offer. In the meantime, please stay healthy. 

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!

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