If you recently purchased a home or refinanced your mortgage, then it’s highly likely that you have received many offers in the mail for “Mortgage Life Protection” or “Mortgage Life Insurance”. In this article, we examine the pros and cons of Mortgage Protection Insurance. You will be able to answer the question: Is Mortgage Protection Life Insurance a scam or a smart move?
Letters in the Mail…and the “One-call Close”
When you buy a house or refinance your mortgage, you will receive numerous letters in the mail. These offers for mortgage protection insurance appear official. They state the name of your lender and the amount of your mortgage. Life insurance companies and agencies obtain this free, public information and then send out post cards or letters. When you see your mortgage company’s name on the letter, it can seem official. Some people think they are required to take action. However, in small print you will usually see a disclaimer such as the following:
We have no affiliation with your lender
Occasionally, your lender will partner with a life insurance company and send offers for Mortgage Life Insurance, but these offers are the exception.
Most of the offers you receive in the mail have a postage-paid response card enclosed. Life agents know they will receive a response rate of approximately 2% to 3%. The next step is to call you and schedule an appointment. Be very careful here. Most mortgage life agents are trained to sell you in one visit. It’s called the “one-call close”. Be prepared for a very convincing presentation. However, insist that the agent leaves the quote with you. Take time to compare it to your other options. Let him or her know this is a big decision and you need time to shop and consider other companies.
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What is Mortgage Protection Life Insurance?
Mortgage life insurance is a policy designed to pay off your mortgage in the event of your death or disability. Commonly, the policy has a decreasing benefit (face) amount that decreases proportionate to the decreasing balance of your mortgage. You, as the policyholder, name a spouse or someone else as beneficiary so that they have the ability to pay off the mortgage in one lump sum. Alternatively, your beneficiary can keep the death benefit and simply continue to make monthly mortgage payments.
Most mortgage life insurance policies offer riders that include disability insurance and Return of Premium. The disability insurance rider is designed to pay the mortgage payment if you become disabled due to injury or illness. The disability riders on these plans are usually not very strong. In other words, the definition of disability is such that you must be catastrophically disabled to qualify for benefits.
A “Return of Premium” (ROP) rider refunds the premiums you pay (excluding any claims) at the end of the term (usually 20 or 30 years). Reading the fine print on the ROP rider is important because details can vary widely.
Some Mortgage life policies are considered “decreasing term” policies. The face amount decreases on a scheduled basis to parallel your decreasing mortgage amount. Of course, this only works on certain types of mortgages and varies considerably, depending on how quickly you choose to pay off your balance. Level term policies cost the same, for the most part, as decreasing term policies. Decreasing term used to be very popular, but these days, it’s less common.
You should be in charge of whether your policy decreases or not. Life insurance carriers allow you to reduce the face mount of the policy as desired, within certain limits. This strategy can be helpful. As the need for life insurance diminishes over time (as your mortgage and other debts decrease). Lowering the face amount of your policy can save you money. We have written more on this strategy in an article called Laddering Life Insurance.
Other Bells and Whistles
You might see other compelling riders included with Mortgage Life Insurance offers. Sometimes, an “unemployment rider” or critical illness rider is available. The unemployment rider waives your premium during your period of unemployment. Again, you need to read the fine print, it’s not as simple as calling the insurance company to tell them you lost your job.
What is GOOD about Mortgage Life Insurance?
Although most of this article is critical of this product, there are some good things to point out. Sure, nobody likes to get inundated with offers for the same product – especially when the offers can be somewhat misleading. However, most people are underinsured when it comes to life insurance. The offers in the mail can serve as reminders – alerting you to a need for coverage. Taking on a large debt should cause you to reevaluate your life insurance.
Making sure your loved ones are cared for financially if you die prematurely or become disabled is of primary importance. That’s the big picture.
There are some independent life insurance agencies that use this “life event” to offer life insurance. They are not trying to mislead you into thinking they are affiliated with your lender, but just want you make you aware of their products or services.
In addition to making you aware of your need for life insurance, Mortgage Life policies can actually be a GOOD deal for some people. Keep reading to find out if you are one of those people for whom this product makes sense.
Why is Mortgage Life Insurance So Expensive?
Mortgage life insurance costs more than guaranteed level term insurance. It’s typically sold as a “Non-Medical” product. Non-medical means that you are not required to have a physical exam (including blood and urine samples) to qualify for coverage. The application process is simplified. It is quick and easy, asking just a limited number of health questions. Mortgage Life Insurance is generally sold with only two classifications: Standard Tobacco and Standard Non-tobacco.
Most companies that offer medically-underwritten level term life insurance offer three or four non-tobacco underwriting classifications, ranging from Standard to Preferred Best. If you are in excellent health, the rate for Preferred Best Non-tobacco will be much less than Standard Non-tobacco. If you are a non-smoker, overweight and taking medication for Hypertension (for example), then you might qualify for the Standard Non-tobacco rate.
Let’s look at a 35 year-old male (non-tobacco) who wants a 30-year level term policy for $500,000. The rate disparity is huge, depending on health class.
- Excellent health (Preferred Best rate): $37 or $38 per month.
- Average health (Standard rate): $74 or 75 per month.
It wouldn’t be a smart move for a very healthy person (normal weight and with no medical issues) to apply for Mortgage Life Insurance because they would pay the same rate as others who are less healthy.
If you have health concerns and do not want to get a physical exam, then Mortgage Life Insurance could make sense.
It would be best to check out the other Non-medical / simplified-issue life insurance products on the market. Shopping for the best rate is always a good move.
Based on your overall health, you could qualify for a Standard-Plus rate or better, even if you think you are not in very good health. Make sure you shop with an agency that represents at least 40 carriers. An experienced, knowledgeable advisor will make sure you get the best possible rate. The savings over a period of time, such as 20 or 30 years, can be enormous. For an example of this kind of savings, please check out this article.
The Bottom Line: Is Mortgage Protection Life Insurance a Scam or a Smart Move?
Mortgage Life Insurance is not a smart move for the vast majority of people. Premiums tend to be significantly higher than level term insurance products. A decent, level term policy (20 or 30-year term) will provide you with sufficient protection.
Mortgage Life Insurance is just a cleverly packaged way to offer life insurance. Some would say it is a gimmicky approach and in many cases they are right. However, as stated earlier, there are many agents who use this marketing strategy by targeting new homeowners.. They recognize the potential need for additional life insurance protection.
Make sure you’re not pressured to make a decision by any agent. Take your time to evaluate all your options. We’re here to help you in this process, so please call for a free consultation or customized quote comparison.