Mortgage Protection Insurance
If you’ve ever purchased or refinanced a house you’ve probably received a post card in the mail with big bold letters saying “FINAL NOTICE: MORTGAGE PROTECTION CARD”. I have and if you’re like me it probably ended up in the trash. While the traditional Mortgage Protection Insurance the post card wants you to buy usually isn’t what’s best for everyone, it’s still something homeowners need to look into so let’s go over what it is and what options are out there for you.
Don’t Confuse it with PMI
First and foremost I want to make sure you do not confuse mortgage protection insurance with PMI. PMI is Private Mortgage Insurance and most banks require this if you don’t have money to put down a house. Usually the lender wants to see you put 20% down on your home purchase or they will require PMI. This type of insurance is designed to reduce the lenders risk by paying a portion of the loan off if you default on the loan. This insurance only benefits the lender. If you default on your loan the payment goes to the lender, not you.
How Mortgage Protection Works
Having an insurance policy to pay off your mortgage for your family in case you are no longer here is a great thing for someone to get for their family. It gives you peace of mind knowing your family will not struggle to make the mortgage payment if you’re not here to provide the paycheck that is needed. Before you respond to that post card though let’s look at what you are really getting.
Mortgage Protection Insurance is basically a form of life insurance. If you have a $120,000 loan on your house over 30 years then you would get a Mortgage Protection policy just for that, $120,000 for 30 years. These plans, while they are great because they leave your family their home with no mortgage to have to pay, they are overpriced in my opinion. These policies are designed to only pay off the mortgage. As you make payments to your mortgage and what you owe the bank becomes less, so does the payout for the policy. The face value of the policy becomes less to match what you owe the bank, but the premiums do not go down to account for the lower payout. This is why I say they are overpriced. When you originally purchased the policy you, bought and are paying for $120,000 of coverage. After 20 years of you paying on your home the policy may only pay out $40,000, but your payments have not gone down to reflect the lower payout.
A Better alternative
Like I said before, Mortgage Protection Insurance is a type of life insurance policy. Instead of having a policy that reduces its’ payout and pays the bank, why not have one where the premiums never change over the life of the policy, the payout stays the same and the payout goes directly to your family to do with as they see fit. That’s what a good traditional term life insurance policy does. The payout stays level, it goes straight to your family and the premiums are a lot of times lower than what the lenders offer. A policy to cover your mortgage is very beneficial to your family and is important one to have. Just make sure you get the one that’s right for you.