Insurance and Credit

It is important to understand the difference between the kinds of mortgage insurance that people may discuss with you as you are in the process of purchasing your home.

There is frequently some confusion among homeowners about the types of insurance they are discussing when they are talking to their bank.

Lenders feel they have to protect themselves when a lender has a small down payment. The borrower is so little invested in the property, that once the mortgage payments become difficult, or the value of the property goes down, he may abandon it. With a small down payment, the dollars invested doesn’t give the borrower much incentive to protect it.

The lender then requires that the buyer take out an insurance policy on the mortgage, but the beneficiary of the policy is not the buyer, but the lender. Note that the bank is the beneficiary, not the borrower or his family.

If you are concerned, as a responsible homeowner and family man, that your family will not be able to continue to afford the mortgage and live in their home if anything occurs to stop your flow of income, you may think about taking out mortgage life or disability insurance.

With this type of insurance, your family will not have to worry about keeping up the mortgage payments in case anything happens to you, the primary breadwinner.

If the insured party dies, mortgage life insurance pays off the loan, and if he is disabled, mortgage disability insurance will make the insurance payments during the period he cannot. Decreasing term mortgage life insurance is the one most people buy, since mortgages go down and therefore it is not necessary to keep the initial loan amount as the policy principal. There is no need to continue paying the premium on a $200,000 mortgage as the mortgage gets lower and lower with each mortgage payment.

For those who are concerned about them and their family being able to stay in their house in case of a medical disability, mortgage disability insurance will pay the monthly mortgage for the disability period.

Take sure you are clear on the terminology that your bank uses when you are discussing mortgage insurance. Lenders may offer these types of life or disability policies, and even make some income from them, but it is important to understand which kind of policy they are offering to you; if you have a low down paymentloan, you may not be getting the kind of protection you think you are.

Understand what you purchase before you buy is always important, but no more so when it comes to disability insurance. Find out about the different kinds of insurance so that you can choose the right one.

One important feature is what the definition of disability is according to the policy. This may be very critical to protect yourself. Be sure whether it covers whether it covers “own occupation” or any occupation”. Your own occupation is what your job is in, and if you can no longer earn a salary in that area, it is understood that your income will be greatly reduced. This feature means the policy will only cover you if you cannot perform any occupation, no matter what it is. Imagine an airline pilot who has been demoted to a clerk.

If you expect to make a comparable salary if you are disabled, but you opted for the “Any Occupation” definition, you may not be eligible for your disability insurance and be forced to take a low paying job. It is important to make sure you amply insured to substitute your old salary.

The next area of question is the benefit period. Normally this goes to 65, but some people might have income expected before this age, and therefore can be sure of not needing the benefit all the way until that age. Retirement funds that become available, or a spouse’s social security may mean that you may not need coverage until 65 after all.

The benefit amount is something that should be carefully examined when you are purchasing a mortgage disability policy. You should calculate collecting at least the amount of the mortgage payment. However, if you have lost your entire salary, will you be able to keep up with taxes, hazard insurance and maintenance? Of course, insuring these will raise the premiums, but it is a good idea to do the cost/benefit analysis.

It is important to understand the basics of an insurance policy. Some policies can also carry riders, which are optional benefits you can subscribe to.

The inflation protection rider is a popular one. Your monthly benefit will go up as the cost of living goes up. Inflation is a fact of life, and you may need to protect against it. There are two kinds, simple, where a percentage is added to the amount received, or compound, which compounds previously granted increases.

Some other riders that might be offered to you are non cancelable policy, guaranteed renewable policy, guaranteed future insurability or waiver of premium.

Disability insurance covers some or all of one’s salary in case one is able to work. This type of insurance may be provided by state governments, or by one’s employer. Unemployment insurance is meant to give you some income in case your job is downsized or lost, and workers comp insurance gives you some salary and also covers your medical bills in case you are injured on the job.

Some policies cover illnesses related to the job, but many cover any illness or injury that prevents you from working. Disability insurance is frequently a benefit given by employers at a low rate since it is part of a group package, and employees always have the right to subscribe to more if they prefer.

These kinds of programs are not intended to replace your full salary, but usually only cover a maximum of about 2/3rd of it, and usually less than half. If you have a home loan to pay, this may seem woefully inadequate, since a home loan payment can take up to half of one’s income in many cases. To protect what is probably your biggest asset, you may want to make sure you can keep up with your mortgage payments when you are sick for a while.

This is where mortgage disability insurance takes over. If you have mortgage disability insurance, your mortgage will be paid through the policy, regardless of another disability policy you may have.

If you have mortgage life insurance, it will take care of your family’s obligation to pay off the home loan in the case of your death. But a disability can wreak a great deal of havoc, and life insurance will of course not kick in. If you were not working for an extended period of time, would you or your family be able to carry the mortgage? This is the problem mortgage disability insurance addresses.

In addition, as is the case with so many of today’s households, both earners can be covered if they both contribute to the payments. If you or your partner is injured, and they are covered under the policy, you would still be able to make the mortgage commitment for a few years. You will still receive other disability payments to cover other living expenses.

There are different aspects to each mortgage disability policy, so be sure to understand each. It is important to be clear on all of the features of the policy before you commit to an insurance policy, for example what illnesses and accidents will it cover and if there a time lapse before the insurance will “kick in”. Once you have made all the comparisons of the offers, you can decide which premiums offer the best coverage for your circumstances.