Why It's Important To Compare Mortgage Insurance

Posted On Wednesday, 01 April 2020 13:21

If this is your first time to canvas premium prices for mortgage insurance, don’t worry. You are not the only one who has had to research online about mortgage insurance. In fact, many first-time borrowers are surprised to know that they may need mortgage insurance if they are going to mortgage real estate.

What Is Mortgage Insurance?

Basically, mortgage insurance is financial coverage for the cost of taking out a mortgage for a real estate property. If you are applying to take out a loan that will help you get a mortgage for your property, the lender may require you to take out mortgage insurance so that they will be able to recoup the cost of the loan, in the event that you default on your mortgage.

Your property will probably qualify for mortgage insurance if the downpayment for the mortgage happens to hover at below 20% for the property value. Many people qualify for mortgage insurance because it is quite difficult to come up with 20% of the property value at one time.

The good news is that the property being mortgaged may actually become more valuable if the owner is able to get mortgage insurance for it.

What Is the Difference Between Mortgage Insurance and Mortgage Life Insurance?

It can be easy to get confused between these two. The difference between mortgage insurance and mortgage life insurance is the choice of beneficiaries of the person insured (the borrower). So a borrower for a mortgage can designate the lender of the mortgage as the only beneficiary of the mortgage insurance. This means the family of the borrower is excluded from any and all benefits from the mortgage insurance. 

On the other hand, the borrower of a mortgage can designate its family and any other loved one as the beneficiaries of the mortgage life insurance policy - meaning, the family and any other loved one can choose to use the benefits of the mortgage life insurance policy for themselves or for paying off the mortgage, as they see fit. They also have the choice of paying the mortgage in full or in monthly installments.

What are The Benefits Of Mortgage Life Insurance?

It is always important to weigh carefully the pros & cons of mortgage life insurance. Mortgage life insurance is insurance that a borrower gets to assure the lender that the latter will be paid should the borrower suddenly die after taking out a loan (in this case, the loan is a mortgage). This protects the lender so that there will still be money coming in to pay for the mortgage for that loan alone.

The mortgage life insurance will also protect the family of the borrower so that the family need not worry where they will get the money to pay for the mortgage loan. The family can use the proceeds from the mortgage life insurance to pay for the entire mortgage.

It is important for a borrower to get mortgage life insurance so the family of the borrower can still live in the mortgaged property since the proceeds from the policy may go towards paying the mortgage. So technically, the borrower didn’t default on the payments since the proceeds of the mortgage life insurance can be used by the family as a lump sum payment or as monthly installment payment just for paying off the mortgage debt. It is important that the borrower who becomes the insured should clarify this with the insurance company right away so that there is no confusion over who is the rightful and legal beneficiary/beneficiaries.

What Are The Disadvantages Of Mortgage Life Insurance?

Yes, there are disadvantages to getting mortgage life insurance. The biggest disadvantage is that the borrower will have to pay premiums for the mortgage life insurance policy, aside from the payments for the mortgage itself. Yes, it’s a necessary expense but the borrower might not have enough money or income to pay for mortgage life insurance. If the lender insists on the borrower getting mortgage life insurance, the mortgage deal negotiations may break down and the borrower will not be able to take out a mortgage.

The second disadvantage of mortgage life insurance is that if it is a term policy meaning it will only pay out a death benefit. This means that when the borrower suddenly dies and the policy is in force, then the beneficiary will only get the amount of the death benefit. If the borrower wants more coverage, he may convert the term policy into a whole life policy instead, meaning it will accumulate cash value or savings plus the coverage will be increased too. But this costs money so that’s why the default status of the policy is that it is term insurance only, to remain affordable.

How to Compare Mortgage Insurance Plans and Why

• Life Insurance vs Accident Insurance - You may need to check if you are getting a life insurance policy or an accident insurance policy from a mortgage insurance company. Some insurance companies also bundle these two types into one policy, to make it less expensive for the policy owner. The difference is that a life insurance policy will cover death only most of the time, unless there are clauses in the policy that allow it to pay claims for disability and critical illness as well. 

On the other hand, an accident insurance policy will only cover accidental death and accidental disability, most of the time. You need to clarify this with your insurance agent.

• Age of the Insured - Basically, the older a proposed insured gets, the higher will be the premiums that the insured or policy owner will have to pay. This is because the state of health of a proposed insured peaks in mid-life then goes downhill over time. Some potential mortgage borrowers may be denied insurance coverage if the insurance company perceives the borrower to be too old to be given adequate coverage. 

An alternative scenario is that the potential mortgage borrower may be given a lower amount of coverage if the insurance company believes that is a better risk for them.

• Cost of Monthly, Quarterly, Bi-Annual and Annual Premiums - The premium is the amount you have to pay the insurance company to remain covered by the policy. Some insurance companies allow monthly payments while others permit quarterly, bi-annual and annual premiums only. 

If you are already going to be paying for a mortgage, check if the coverage of the mortgage insurance is equal to the mortgage debt you got. This gives you an idea of the size of the premium you will have to pay, as well as how often you need to pay a premium.

• Name of the Insurance Companies Offering Mortgage Insurance Protection - Your lender may agree to lend to you if you can show proof that you are insured by certain reputable insurance companies. Not all insurance companies out there are legit so you need to do your research to look for a competent and reputable insurance company. Then ask the lender if they will agree to lend you money if you get from one of the companies in your short list. The lender might also suggest some insurance companies to you that they usually work with.

• Amount of Coverage Provided for a Particular Plan - It is important to assess just how much insurance protection you need, under the kind of plan offered to you by the insurance company. Generally, you want this insurance policy to completely cover the mortgage balance, assuming you were already deemed a good risk by the mortgage lender. 

It isn’t really a good idea to bundle the coverage of your mortgage insurance plan with the coverage you need for your family’s support - keep the purposes of each insurance plan separate. So you can get a mortgage insurance plan for the mortgage lender then get another insurance plan for the support of your family. That way, if you suddenly die or get a disability your beneficiaries will still be able to pay the mortgage with the correct policy.

• Coverage for Loss of Employment - Not all insurance companies, particularly those that offer life insurance and/or accident insurance, provide coverage for loss of employment. But some do so it makes sense to inquire with more than one insurer about this first. If you cannot find an insurer who will provide coverage for loss of employment, you can ask the mortgage lender if they could recommend an insurance company that does provide this kind of coverage.

• Medical Exams Prior to Coverage - Some insurance companies are strict about the borrower seeking a medical check-up first before being insured. Others are not so rigid about this rule because it actually costs the insurance company a tidy sum just to initiate medical exams for the proposed insured. If you like, you can ask your life insurance agent if they will need to have you checked out by a doctor first before you can be insured. Take note that it is possible for the insurance company to reject your application for insurance if you have a serious pre-existing medical condition. 

• Benefits Offered In Each Type of Plan - Looking through the benefits that are offered in every type of plan by each insurance company can leave you a bit dazed. But this is necessary because you will be paying money to be covered by mortgage insurance so you need to get your money’s worth of benefits out of it. If you want to make it easier on you, contact each insurance agent you have in mind one at a time. Then go over the insurance proposal with the agent that brought it to you. If there are benefits that are not clear to you, just ask for a short explanation.

• Riders That Can Be Added To Your Regular Policy - Some insurance companies allow the insured to get additional coverage for the mortgage insurance policy by offering “riders”. A rider is basically a promise by the insurance company to do something for you in exchange for payment of a higher premium. Some common riders are: Return of Premium Rider, and the Disability Waiver of Premium Rider. The Return of Premium Rider promises to give back the sum of your premiums paid, provided the term of the policy has closed. The Disability Waiver of Premium Rider promises to keep you covered while you are recovering from a temporary disability, on the stipulation that when you are well already you will keep paying your premiums.

• Level of Risk Assumed by the Insurance Company - If this is your first time to be insured, your agent may inform you that some people who seek insurance may be denied because they are considered “high risk” prospects. What that means, in layman’s terms, is that some people will represent a higher risk for the mortgage insurance company because these borrowers: a) have less money to pay their mortgage down payment with; b) have a poor credit score; c) have other debts that they are currently paying for; or d) may have some dubious transactions on their financial records. 

If the deal is for mortgage life insurance, you might also have to pay higher premiums because: you are already aging; your level of income is on the low side; you have too many dependents whom you are still supporting with your income, or your health is compromised by some health conditions or pre-existing illnesses.

Conclusion

If this is your first time to seek mortgage insurance, don’t fret. It is not as hard to understand as you might be thinking. However, you will still need to meet some requirements before you can successfully procure and start paying for mortgage insurance. Because of that, you may need to start doing your research on comparing mortgage insurance plans and how insurance companies can help you get the right mortgage insurance policy that meets your needs. 

The good news is that it is possible to procure the correct mortgage insurance so that the lender will agree to award you a mortgage deal. This will allow you and your family to be able to live comfortably in your own home, even if something suddenly happens to take you out of the picture forever.

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