Archive for June, 2009

Mortgage Disability Insurance

June 13th, 2009 5 comments

Mortgage disability insurance will pay your monthly mortgage payments when you become disabled. These policies will cover your monthly payments for 2 to 5 years or until you recover from the disability, whichever is sooner. You can add the disability insurance cover to your life insurance so that you will have a comprehensive coverage. While other kinds of insurances cover death, job-loss etc., this insurance coverage will come to your rescue when you cannot work due to physical conditions. You are buying a peace of mind knowing that you do not need to worry about your mortgage payment until you return to work. MLINS09©

Superman in a Wheelchair
Creative Commons License photo credit: A.Currell

The insurance monthly pay out is generally between 60 to 70% of your monthly income. The payment is determined by your average salary, age, and the extent of coverage you choose. In many cases, the payment maximum is set to $2,000 for basic coverage. Review your monthly mortgage related expenses and figure out the amount of coverage you need. These days, most employers offer optional disability protection for a fee and in some cases it might be enough if you are looking for basic coverage.

Long Term Disability Coverage

Most mortgage disability insurance contracts will not cover the long term disability beyond 5 years. Be sure to check your policy to understand the coverage restrictions for long term disability. Most people do not need the coverage beyond 5 years continuously, unless they have terminal illness which is a very rare condition and conditions like that demand better health insurance coverage. Disability insurance will cover your monthly payments including the escrow payments such as county taxes, home owner’s insurance etc. However, the monthly payment you receive cannot not be greater than your monthly mortgage payments including taxes, home owner’s insurance etc.

You can receive disability benefits many times in your lifetime even though cause is same. However there will be restrictions such as 6 months quiet period. You may be permitted to apply for new disability only 6 months after your first disability period. Some companies do not have such restrictions. Check with your insurance provider for more details.

Mortgage Critical Illness Insurance and Mortgage Disability Insurance

While disability insurance and critical insurance are very similar products, there are some differences between the two. Critical illness insurance will pay a lump sum amount and supposed to provide sufficient funds for a longer duration. Disability insurance will pay monthly payments and the coverage will not last longer than 12 months. Disability coverage and premium is based on your work history, salary etc. while the critical illness coverage is based on family medical history and medical exams. The insurance pay out is generally tax free in both cases.

Mortgage life insurance and disability insurance

Mortgage life insurance pays out in the event of a death of the borrower, but may not pay during disability. Disability insurance will complement the life insurance so that you will have complete coverage. Take note that disability insurance cover can be added as a rider (additional clause) to the life insurance so one policy will cover all aspects.

Waiting Periods for Critical Illness Disability Insurance

Many mortgage disability insurance policies will have a waiting period (also called elimination period) ranging from 1 month to 3 years, before they pay your first or subsequent claims. The longer the waiting period, lower is your insurance premium. So by choosing a longer period, you can reduce the insurance costs, but ensure you have enough savings to cover the living expenses including mortgage payments if you are choosing longer periods.

Insurance companies reward you for choosing a longer waiting period so they can avoid those policy holders who purchase mortgage insurance knowing that will benefit from the policy sooner. A person with a critical health condition may buy a policy with immediate coverage is one such example. If you are a healthy person and have enough living expenses covered for several months, then you can save on insurance premium by choosing longer waiting period.

Important things to know about disability insurance

As always, do not choose an insurance product just because it is cheaper than its competitors. Do your research and ensure the company is in good standing and takes care of its customers. You can research online for customer reviews, company ratings, BBB ratings and rip-off reports for any company. Due diligence will pay off!

Apart from fraud concerns there are some important things your need to verify before you cut the check.

  • Some disability insurance policies do not cover the incident if you are already covered by another similar policy. Disability insurance is generally offered by your employer for a group negotiated fee. If you have the coverage from the employer, the additional coverage you buy might not pay out due to this clause. Make sure you understand such restrictions. In some cases you may be better off getting additional coverage from your employer provided disability insurance, which tend to be cheaper if you work for a big company.
  • Some policy terms dictate that you will be paid only if you become completely disabled. You should not choose such policies. Instead, make sure the policy will pay out if you cannot perform your regular work duties due to disability. That means regardless of the level of injury or disability, you will covered of you are not able to earn a living due to your physical conditions.
  • Many of the reputed insurance companies like State Farm offer disability insurance. Start exploring your options from your auto or home insurer first.
  • Review your social security benefits which might be enough if you are looking for basic coverage. Please note that social security coverage tends to be very restrictive and will pay out only when you are completely disabled.
  • Disability insurance is meant for those who are working full time. If you are not on someone’s payroll or running your own business, you may experience difficulties with getting the coverage.
  • The insurance premium is not tax deductible; however, the payout amount is generally tax free.