While many are familiar with disability and life insurance, some consumers may be confused by mortgage life and mortgage disability insurance. These types of policies are only related to a mortgage loan attached to a piece of real estate. While not all mortgage customers elect to take these policies (it is not required), it can be beneficial to certain customers.
What Is It?
Unlike standard life and disability policies--where, upon receiving an approved claim, a consumer is paid a certain predetermined dollar amount for a predetermined amount of time--mortgage life and disability policies pay only mortgage debt. If a consumer has disability insurance on his mortgage and becomes disabled, his insurance company would make payments until he can work again. In a mortgage life insurance claim, the full mortgage balance is normally paid in full (or the full amount of the policy).
Misconceptions
It's important to differentiate between mortgage life and disability insurance and PMI, or Private Mortgage Insurance. PMI is lender-placed insurance that protects the lender only. This type of insurance--usually placed on loans that are greater than 80 percent of the property's value--protects the lender if the borrower defaults on the loan.
Weighing the Benefits of Disability Insurance
The cost of mortgage disability insurance is generally high, but can be beneficial for certain customers. For example, consumers who work in high-risk positions--like construction, commercial fishing, and farming--might find good use for this insurance to prevent making payments in case of a serious injury or disability.
Weighing the Benefits of Life Insurance
While mortgage life insurance is often the cheapest form of life insurance, it is often declined. The reason being, most responsible mortgage customers have personal life insurance policies that would cover the full amount of their mortgage already. However, if you have limited life insurance coverage on a personal policy, a mortgage life insurance policy may be in a your best interest.
Warning
Mortgage life and disability insurance is completely voluntary. Some unethical lenders may try to aggressively sell insurance products to increase their commissions. If you feel compelled to purchase mortgage insurance, you should switch lenders immediately--ultimately, every decision on a mortgage is voluntary and up to you.
