If you are a new homeowner or have recently refinanced, your lender or an insurance carrier may have approached you about Mortgage Protection Coverage. This is an often confusing product as the name itself is a bit misleading; it is not the actual mortgage that needs protection, but the home itself.
How Does Mortgage Protection Work?
Mortgage Protection is essentially a life insurance product designed to pay off a mortgage in the event that the borrower passes away before the loan is satisfied. Traditionally the benefit would pay out to the bank or mortgage company directly and the amount of coverage in-force would diminish as the homeowner paid down on their loan. Today however, most mortgage protection plans look identical to a standard life insurance policy where the insured chooses a beneficiary, and in almost all cases there is a level of benefit amount. Likewise, today’s plans are portable, meaning it follows the insured not the home, and the payouts are usually tax-free.
When Should I Think About Mortgage Protection?
Earlier is almost always better. It is contingent on medical eligibility, so if an insured gets covered early then locking in a low rate is possible, otherwise the possibility of finding affordable coverage may not be available.
A new home, or a marriage, or having children should at least stir the importance of doing a review of coverage to determine if adequate protection is in place. I have often visited with families that don’t understand their coverage, and think they have protection that they don’t have, but really they are exposed to risk. At the very least you should do a review of your coverage. If you have multiple policies, keep all of them in one place like a good file cabinet, and have those policies reviewed together instead of one at a time.
What Type of Plan is Best for My Family?
Since there are so many types of plan designs when it comes to mortgage protection, which is essentially life insurance, knowing how to structure a policy can be confusing. If however, you have a 15 or 30-year home note then often the most practical and affordable option is 20-year level term plan. Term coverage is relatively inexpensive and thus allows for the needed protection to cover the mortgage. Permanent coverage can often be cost prohibitive.
If an insured does already have 8-20 times annual earnings in the form of life insurance that is not from an employer, and has sufficient years with a level premium remaining, then picking up new coverage may not be needed.
Review Your Coverage if You Haven’t Already
Mortgage Protection, like any life insurance plan, works best when approached proactively and reviewed regularly. If you are not already protected, schedule a review with an independent agent that can help you shop to find affordable coverage. If you are covered, do a review at least every 2 years. Your most valuable assets are often linked to your most loved people.