Posts Tagged ‘Mortgage Critical Illness Insurance’

Mortgage Protection Insurance

July 2nd, 2009 1 comment

Mortgage protection insurance covers your mortgage payments in the event of death or inability to earn wages due to involuntary unemployment or health problems. The most basic form is the mortgage life insurance which pays out the mortgage balance lump sum amount to the beneficiary. Then there are various flavors added such as disability rider, unemployment cover, critical illness etc., so that you will have a comprehensive coverage if you desire.

The idea is to protect our house from the lender when you are not able to make payments. MLINS09©

Mortgage protection insurance and mortgage life insurance are same products but marketed with different names to have a different appeal to the consumers. Please refer to mortgage protection insurance article to learn the consumer needs, eligibility terms, policy restrictions and the major insurance providers. In this article, we list the major types of mortgage protection insurances.

Types of Mortgage Protection Insurance

Insurance and financial products used to be simple and easy to understand. Not any longer. Life insurance comes in many flavors (whole life, term life, universal, return of the premium etc.) and so does the mortgage life insurance. There are specific types of policies to cover the life risk, disability, critical illness, and unemployment risks. More choices are always good for you, provided you understand them clearly and have the tools to help you choose the right product or a combination of right products. Broadly speaking, there are four broad types of mortgage protection insurances each explained here separately.

Mortgage Life Insurance

This is the most basic form of mortgage life insurance which covers only the life risk. The policy holder will insure his mortgage and a designated nominee will be the beneficiary. In an unfortunate event of death, the insurance will pay off the mortgage fully and the beneficiary (generally the spouse) will own the house with no obligation to make monthly payments. Generally, the mortgage lenders offer this kind of insurance and the premium is added to the mortgage payments. However, note that insurance premium will be a lot cheaper if you shop around and choose an independent insurance provider, instead of going with the mortgage lender or with the mail offers. Borrowers aged between 16 and 64 years can purchase this insurance.

As an alternative, you can buy term life insurance for bigger amount that covers the mortgage as well as your living expenses. In any case, the premium paid will be lost if you stay alive after the policy maturity, unless you buy Return of the Premium policies which will refund the premium paid along with interest. However, such whole life policies tend to be more expensive since the insurance company will have pay you either ways.

The next 3 types of policies are add-on products that could be attached to the mortgage life insurance. These are called covers or riders which are basically additional clauses in the insurance to cover extra risk.

Mortgage Disability Insurance

While the mortgage life insurance pays off the mortgage fully, the mortgage disability insurance will just pay your monthly mortgage payments when you become disabled. The coverage will be for short term only. The insurance company will make monthly payments on your behalf for up to 3 years or until you recover from the disability, whichever occurs first. The disability insurance rider can be added to the life insurance so that you will have a comprehensive coverage with a single policy. While other kinds of insurances cover death, job-loss etc., this insurance will cover disability and come to your rescue when you cannot work due to physical conditions. You are buying the peace of mind knowing that you do not need to worry about your mortgage payment during disability. This is kind of insurance is offered by your employers as well and the premium tends to be cheaper and comes with an option to increase the coverage based on your needs. To learn more, check Mortgage Disability Insurance article.

Unemployment mortgage protection insurance

Losing your job is a painful experience, more so if you do not have emergency finds to take care of your living expenses and mortgage payments. In the event of a job loss, you are eligible to receive assistance from the State unemployment agency, but those benefits will not be enough to cover even the living expenses for most people. You want to protect your house so that you don’t need to vacate your home for failing to make monthly mortgage payments. House foreclosures, short sales will have adverse effect on your credit history and should be avoided at any cost. That is where unemployment mortgage protection insurance will help you make mortgage payments while you are unemployed.

Based on your need, job-loss mortgage protection policies can cover all or part of your monthly mortgage payments. Such policies will cover a maximum of 6-8 months of monthly payments in a year. Most policies do not pay until 30 days after you are laid off and may require you to show proof of unemployment. Many unemployment insurance policies do not provide coverage for the first 6 months of the policy period. This clause is added because insurance companies want to avoid those who sign up for a new policy when lay off in the company is anticipated. Refer to unemployment mortgage protection insurance article to better understand such restrictions.

Mortgage Critical illness Insurance

Just like unemployment insurance, critical illness insurance will also pay the benefits to the insured, not to the beneficiary. You will be insured against sever health conditions such as stroke, heart attack, kidney failure, cancer etc. among several other diseases listed by the insurer. If you are critically ill, the insurance will make a lump sum tax free payment to pay off your mortgage or other liabilities. Only those health conditions pre-approved by the insurer will be covered, but most companies cover the major diseases.

Critical illness insurance is popular in Europe and Australia, but is also gaining popularity in United States. Most policies require that the insured person survive a minimum survival period, generally about 30 days. You can get critical illness cover for the mortgage or for the life, in which case the lump sum amount can be used for other purposes including mortgage payoffs. You can expect to go through thorough medical exam when you apply for a policy to make sure there are no pre-existing conditions. Your premiums may be higher if you have a family history for any of the listed diseases.

You will be able to add critical illness cover to your mortgage life insurance so that one policy will provide all the coverage.

Mortgage protection insurance is different from Private Mortgage Insurance (PMI), which provides insurance protection to mortgage lenders. You will pay insurance premium for PMI when you are buying a house and do not put 20% down payment. This insurance will protect your mortgage lender in case you cannot make payments and lose the house.

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.