The Pros and Cons of Mortgage Protection Insurance
Are you about to sign your new mortgage contract, but are worried that if you lose your job or die, your survivors might not be able to cope? To have peace of mind, you may want to think about getting mortgage protection insurance as one of the home insurance services that lenders offer.
If you don't know what this is and you want to know how it works and why it is what you need right now, keep reading.
Becoming a Homeowner
Now that you are a fully fledged homeowner, it is OK to be overjoyed about this kind of accomplishment. Give yourself a pat on the back because not many people in their lifetime are able to achieve this.
However, there are some things you have to consider now that you will be paying monthly premiums for the next thirty years to a bank that can take away your home, if you default on the loan. You wouldn’t want to be in that position where you have saved up your hard earned money and purchased a home; only to have it taken away. Absolutely not! Once you sign your name to those mortgage documents, you don’t know what will happen next; other than getting the keys and moving in.
Preparing For Life’s Sudden Issues
Life has a way of throwing curve balls that none of us want to catch. However, anything can happen to anyone at anytime and so, in order to be prepared, it is best to consider mortgage protection insurance to cover you in case there is an unexpected situation where you are unable to pay the mortgage for a few months. There are some serious questions that you need to ask yourself such as:
What would happen if I die suddenly?
How would my family handle the bills left behind, especially the mortgage payment?
What amount of debt will my partner have to take on?
Would my partner lose our house?
What kind of provisions should I make for my family?
Should I make a will?
These are common questions that most people ask and it is quite normal to consider these things before anything happens. If you want to secure the future for your family, getting mortgage protection insurance should be an informed decision because you have to consider the pros and cons of doing so.
Obtaining mortgage protection insurance or MPI means that you will be protected in case of a dire situation where the mortgage payment has become too much to handle. MPI option is only about $15 to $50 extra on your mortgage payment each month; depending on the lender.
Of course, you should learn as much as you can about this option and the benefits or disadvantages it might have for you. Some protection is better than no protection at all. Let’s look at what mortgage protection insurance is first.
What is Mortgage Protection Insurance?
This insurance helps when you are caught in various situations like being suddenly unemployed; whether you were fired, or laid off or just plain quit. If you find yourself injured after an accident and are disabled, then mortgage protection is very helpful. Your risks will be reduced; giving you a financial backup plan so you don’t have to lose your home.
Mortgage Protection Insurance guarantees the mortgage payment for unemployment whether for employees with permanent contracts and temporary work incapacity as a result of illness or accident. It is also good for self-employed workers, civil servants and workers employed on temporary contracts.
Are There Grace Periods?
Remember that the grace period means the non-coverage during an initial period established from the entry into the insurance and the effect of the coverage. In this case, the grace periods are:
In case of unemployment:
There will be no coverage for these benefits until two months from the effective date of the coverage.
temporary disability due to illness:
There will be no coverage for these benefits until one month from the effective date of coverage.
Temporary disability due to accident:
In this case, there is no grace period.
It will not be possible to receive unemployment benefit if you are entitled to receive the disability benefit. Loss of work due to causes beyond the control of the worker is covered, which is obvious. It would make no sense to ensure payment to one who leaves the job of his own free will.
The Advantages
This type of insurance will fully pay off a mortgage, if the mortgagee loses his or her life by any cause or incident. The insurance company will handle the process; sending the check directly to the mortgage lender. For that reason, any survivor left behind will have no mortgage debt to pay off. It makes everything so seamless, stress free and easy on family members.
Acceptance Rate
Most mortgage protection insurance policies are known for their high rate of acceptance. Insurance providers will rarely turn down homeowners for this type of insurance. Yet, there are so many people that choose to use disability insurance and life insurance for coverage. While nothing is wrong with that, too much coverage is never enough. On the other hand, there are some people that choose to cover their mortgage through the protection policy because of not being eligible for any other coverage due to pre-existing medical conditions or age. If you don’t qualify for life insurance, then the best thing is to get the protection insurance.
Peace of mind
Having coverage only serves to give you the peace of mind needed to know your family and survivors will be taken care of. It provides a safety net, if you lose your job, die or have a disability. When you have the right coverage, there is not needed for the stress about paying your monthly mortgage premiums.
Accessibility and Availability
Another feature of this type of policy is the accessibility and availability that it provides. Most companies issue the policy on a guaranteed acceptance foundation unlike the life insurance term policy, which must go through medical clearance first. So, it is safe to say that you would benefit from getting coverage, if you are not insurable elsewhere.
Risks on the job
If you work in a company where your job has a lot of risks such as deep see diving, Alaskan fisherman or logging, then you should consider securing your mortgage payments with protection insurance. If you get ill or injured on the job, then at least, you won’t have to worry about your loved one’s welfare and future. A mortgage payment is a huge responsibility for any family member, especially, if you were the only breadwinner that everyone relied on.
The Cost
One of the advantages of covering your mortgage payments is that the cost is relatively affordable. Most people own their homes while in their mid-30s and so youth is still giving them the benefit of being around for a while. However, no one knows what is going to happen; whether you are young or older. If you purchase this type of policy in your 30s, you end up paying less compared to buying it when you are older.
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The Downsides
Term insurance has a face value, which is maintained through the entire duration of the policy and so, the benefits are still worth the same as when it was secured. In the case of protecting your mortgage, that kind of insurance pays only the equal amount of the debt, which is outstanding when the mortgagee dies. It pays no more or no less.
Losing your job
If you were to lose your existing job, the policy would not pay you the equal amount of your wages. It would pay you only a percentage as defined in the initial contract. This may seem unfair, but the reason why insurance companies do this is to encourage you to go back into the workforce.
Invest In emergency fund
If your mortgage payment is low, the insurance might not be worth it. Many experts believe that it would be best to invest in an emergency fund for that financial cushion, in case something happens such as death, disability or unemployment. If you were to maintain an emergency fund, you should make it about three to six months of salary put aside. However, make sure you can afford doing this and paying your monthly mortgage premiums.
Value Decline
If you were to get a life insurance policy valued at $200,000 and you continue to pay the premiums, when you die, the survivors would receive the exact same amount of the policy. With protection insurance for your mortgage, it would only cover the amount needed to pay off the remaining balance. Each time you pay your monthly premium, this amount is reduced.
This means that the value of the mortgage is declining to a lower amount to be paid out in lieu of death while you are still paying the same premium for the insurance. For each one of your mortgage payments, your payout declines. For that reason, if your mortgage was reduced from $250,000 to $50,000, the lender would only get $50,000 at the time of death. You probably paid more than $50,000 in premiums for that same policy.
Not transferable
In addition, you do not see that money. It goes directly to the mortgage company, which may literally not be in the best interest of your loved ones. For example, if your mortgage was fixed at 5 percent and the existing rates at the time the policy is paid out is 10 percent, wouldn’t your heirs prefer to have the money send directly to them so they can pay the lender and invest the remainder? Last, but not least, this type of insurance is not transferable. If you were to refinance your house for a better interest rate, it could simply disappear.
Conclusion
It is easy for some people to dismiss the protection because of the disadvantages, but it is best to speak to a professional to know what your options are and what is best for you and yoru family. Make sure that the contract offers a description, as detailed as possible, of the guarantees and coverage offered in the policy.
If you want to know more about how you can really take advantage of this, you may want to check out Goalry, which is an online platform with the Insurry store, which is all about insurance policies.