Should I Buy Mortgage Protection Life Insurance?
You guys were right. Less than a month since we closed on our mortgage loan, we are already getting bombarded with letters offering “mortgage life insurance”. The official-looking letters seem like they are from your lender, but are really just another piece of junk mail.
The pitch is pretty simple - it will pay off your entire mortgage in the event of your death. You don’t want your family to lose their home, do you? *sniff* *sniff* If I do it soon, I don’t even have to submit to a medical exam. (This is not the same as Private Mortgage Insurance or PMI, which is to protect the lender when you have a small downpayment.) The problem is that it’s usually a better idea to simply buy a plain term life insurance policy with a comparable or greater cash payout. Here’s why:
Term Life Insurance Offers More Flexibility
So let’s see, if I buy mortgage protection insurance and die then my loan is paid off. What about the rest of the monthly bills? Childcare? The house isn’t everything. Wouldn’t you rather leave your family a lump sum of cash to do whatever you want with, rather than have a paid-off home with all of the equity stuck inside? They could even buy an annuity to replicate your income.
Mortgage Life Insurance Has A Shrinking Payout
Remember, this insurance only covers the mortgage. As the years pass, you keep paying premiums, but your loan balance keeps on shrinking! After 10 or 20 years, your benefit will be greatly reduced. Compare this with most term life insurance policies which offer a fixed payout.
Oh, and don’t be fooled by a “return of premium” (ROP) feature. Sure, they’ll refund 100% of your premiums at the end of the term. Not only does this cost more than non-ROP insurance, but that’s ignoring the fact that in the meantime they’ve been investing your premiums and making lots of money off of it (which you could have been doing instead). And if you miss just one premium payment you’ll be disqualified.
Term Life Insurance Is Probably Cheaper
Insurance is all about statistics. If the policy requires “no medical exam”, then it’s going to be more expensive in order to cover everyone. If you don’t smoke and are in average or above-average health, then you should simply apply for insurance that does require a medical exam. Now, if you are in poor health, then this might be an opportunity to get some insurance that otherwise might not be available to you. But remember that there are also a few no-medical-exam term life insurance companies out there.
Mortgage Protection Life Insurance Is Hugely Profitable
In addition, simply since this product is marketed by fear (remember your homeless family!) and primarily through unsolicited mailings, it has a higher profit margin and thus higher cost than regular term life insurance. This is supported by this InsWeb article that states:
The National Association of Insurance Commissioners (NAIC) says that mortgage insurance lenders pay out only about 40 cents in benefits for every dollar consumers spend buying that type of policy, compared with 90 cents on the dollar paid out to consumers who hold regular term life policies.
60% profit vs. 10% profit! I wouldn’t even bother myself, but if you must, simply comparing quotes with an insurance comparison website like SelectQuote will provide you an easy answer as to which is a better deal.
Find more in Insurance, Real Estate | 3/16/08, 6:17am | Trackback
March 16th, 2008 at 8:39 am
Haha! I received my first letter, less than a month after closing, on Friday. Straight to the trash. Your analysis is right on.
March 16th, 2008 at 10:45 am
Recently a Canadian tv network did a special on mortgage life insurance http://www.cbc.ca/marketplace/in_denial/
Mortgage life insurance is underwritten ‘post-claim’. In other words you’re always approved because they determine whether you qualify AFTER you file a claim instead of before as is customary for life insurance. Not only is it better value to buy term life, but you are sure to get the payout because your insurability is determined at the time you apply for insurance.
March 16th, 2008 at 3:09 pm
We bought our house last May and received tons of these offers, especially in the first 6 months or so. They’ve stopped lately, so that’s good.
We’ve never really paid much attention to them, and just throw them away whenever we do get them. If insurance is a priority to protect against any possible life emergency it’s probably better to just increase the amount of money you’re putting towards your life insurance policy with your job (if offered) or otherwise.
March 16th, 2008 at 3:15 pm
That and credit insurance and stuff don’t make sense to me. As you say, life insurance can cover it all without being limited to the mortgage. I’ve seen a number of good life insurance calculations and almost all include the mortgage (or part of it) anyway.
March 16th, 2008 at 4:56 pm
Not all mortgage protections policies are guaranteed issue. But they are usually “simplified issue” - meaning no medical exam. If you are in good health you can sometimes get a better rate by getting a fully underwritten policy. It’s basically a marketing deal by the insurance companies - and a good one, since most people do need term life to protect their families. (Disclaimer: insurance agent)
March 16th, 2008 at 6:50 pm
This is a tad off topic. I can’t offer you any advice about the mortgage insurance other than the fact that I didn’t see the worth of purchasing it myself. But, you did purchase title insurance, I hope?
March 16th, 2008 at 7:28 pm
Think about what Mortgage Insurance really is, a insurance policy for the
bank, and they get the consumer to pay for it.
I totally agree with the idea of getting a term policy equal or greater than the mortgage amount. If something happens to me, my family has the flexibility to use the cash as they see fit.
Great Blog, keep up the great work!!!
March 18th, 2008 at 11:46 am
Jon
I think you should write an article on the discussion of a Home Warranty and maybe how long you should keep paying on one.
March 20th, 2008 at 1:00 am
Without having read the blog (just read the title), the answer is “No”. But you should have life insurance.
March 23rd, 2008 at 5:35 am
My Remedy: Send the envelopes back EMPTY and stick it to them so they get smacked with the postage fees. HA!
March 27th, 2008 at 3:16 pm
(’m a longtime lurker, never commented though!) It’s worth noting that even though there is no medical exam, and some of the flyers make it sound like there’s only like three medical questions (which you fill out and send back in), they’ll call on the phone and ask loads of personal questions about your medical history, and if there’s anything in it, you’re basically out of luck. I was hoping to be able to sign up for it when we bought our house–I was about eight months out from a cancer diagnosis, so it seemed like a good investment since I can’t get life insurance–but no luck.
Also, some of them are especially scammy, in that they give your contact info to multiple businesses and then they each call you for the next 12 months.
April 7th, 2008 at 9:33 pm
I responded to a flier and met with the insurance agent for a mortgage credit life product I am confused. What I did like about the offer was that it protected me if I lost my job for 9 months and my wife doesn’t work. It would give me 9 months of payment and the monthly premium is not bad. The insurance company is a double AA rated public company. There doesn’t seem to be much information on the internet about type of coverage and wanted to see if anyone knew of anyone else I could get quotes from to compare rates. Also, if there were any simple Term Life policies out there that might be less expensive but would cover me if I lost my job. I don’t want to have to die in order to use my life policy, or worse yet get critically disabled/sick to use the disability from my job. What if I lose my job?
If anyone with REAL information on this, please respond
May 2nd, 2008 at 4:57 pm
Hello everyone,
You all have valid points. I currently work for a life and supplemental health benefits company and they have been around for over 100 yrs. Our company provides Mortgage Term Life Insurance and yes after a certain amount you do have to either do an oral swab, medical exam, or be in somewhat of good health or perfect health. Companies that do offer term insurance without medical exams are more expensive and the payout is definitely different. As far as being able to take care of bills, etc. after the mortgage has been paid off if someone dies, you would need to get a monthly income plan that would pay out a certain amount a month to the surviving spouse, or beneficiary. You can also specifiy a certain amount that you want to be paid as a lump sum. As for Mrs. Fuller, only maybe a handful of companies can cover you, but the only thing is they will only cover you for a certain amount. I know our company has a policy that covers all major medical diseases except AIDS. Depending on what state you live in, if you are interested I can lead you in the right direction. I must add, because it is a major medical condition it is going to be a little bit higher than your normal policy, but it will give you some coverage that other companies wont.
May 6th, 2008 at 10:51 pm
Mortgage Protection Life Insurance is great depending on your situation. You can insure for more than your mortgage. If you insured for 150k and your spouse dies years later when your mortgage is 30k than you have 120k to do what you will. You may have group insurance through your job but thats only as long as you stay with that employer. MPLI may not be for everyone but its a great safety net when needed.