By: Yara Zakharia, Esq.For most Americans, a home represents not only safety, comfort, and shelter, but also the most important investment of their lifetime. According to the National Association of Realtors, a single-family home costs well over $200,000. It is not surprising, therefore, that homeowners go to such great lengths to preserve their prized castle. To avoid walking on a thin financial line, many prospective home buyers rely on mortgages to acquire a piece of the American dream. Living day to day, many of us fail to look ahead and contemplate potentially life-altering contingencies. Foreseeable or unexpected scenarios include 1) disability, 2) death of the breadwinner, 3) unemployment, 4) loss of a job, 5) an incapacitating accident, and 6) serious illness. The critical question then becomes how to pay off the mortgage. Ordinarily, family members would find themselves in a vulnerable state and run the risk of 1) foreclosure on the property and repossession by the lender and 2) homelessness. Fortunately, a financial planning mechanism known as mortgage protection insurance operates to safeguard the insured or his or her loved ones by keeping the roof over their heads and ensuring that their mortgage bills are paid. With its comprehensive package of coverage, home mortgage insurance ensures that, no matter what life throws at them, borrowers or their beneficiaries will keep the place they call home.
Alternatively dubbed mortgage life insurance or decreasing term insurance, mortgage insurance is, in essence, a life insurance policy that primarily serves the beneficiaries' rather than the creditor's interests. In the event that the insured dies during the policy's term, this insurance policy pays off the outstanding balance of the mortgage. Mortgage protection insurance companies require borrowers to pay a fixed premium for the duration of the policy. The amount of mortgage insurance purchased corresponds to the amount that the borrower owes on his or her mortgage. Each monthly payment lowers the amount of mortgage protection. If the insured dies during the term of the policy, the mortgage protection company retires the mortgage and pays off the balance. The outstanding balance on the mortgage is referred to as the death benefit. If the borrower defaults on the mortgage, however, the policy's beneficiary becomes the lender.
The standard mortgage insurance coverage provides for mortgage payment upon the insured's untimely death. Homeowners may also obtain joint coverage for themselves and their spouse, in which case the insurer pays the death benefit upon the death of either spouse. Additionally, mortgage protection plans offer consumers supplemental riders to protect them in the event of disability, critical illness, unemployment, or accident. Borrowers may tailor the policy to suit their personal circumstances. For instance, they may purchase coverage against unemployment, sickness, and accident or conversely insure against only one event.
Homeowners are not required to undergo a physical examination in order to buy mortgage insurance. This type of protection is ideal for individuals who would otherwise be disqualified from other types of disability or life insurance due to poor health or other reason(s). Mortgage life insurance offers greater benefits for families than ordinary term-life insurance policies. Should the insured experience an accident or suffer an illness and be unable to work, mortgage disability insurance will take care of his or her periodic mortgage payments. The "Waiver of Premium" provision in mortgage insurance policies excuses the insured, while he or she is disabled, from paying his or her premiums. This enables disabled policyholders to focus on recuperation and re-integration in the employment arena without being preoccupied by the prospect of losing their home. Some eligible policyholders may receive mortgage disability insurance benefits that offer cash for purposes of paying off the mortgage.
Borrowers who fear losing their livelihood and source of income may avail themselves of mortgage unemployment insurance. Such a policy typically covers an insured's premiums for a period of up to 6 months if he or she becomes unemployed. The premium rate or cost of mortgage unemployment insurance and other types of mortgage insurance protection policies depends on the amount that the borrower chooses for the monthly benefit. Smoking, age or other criteria that raise the likelihood of a claim do not have an effect on the prices of standard mortgage insurance policies.
Consumers should not confuse mortgage protection insurance with private mortgage insurance (PMI). Lenders require borrowers who cannot afford to fork over a 20 percent down payment to obtain PMI in order to qualify for home financing and ownership. PMI protects creditors in the event of default by homeowners on low down payment loans. Unlike mortgage insurance, PMI does not repay the mortgage balance or make mortgage payments if the insured is unable to do so.
