Mortgage Protection Plans

mustangs81October 19, 2005

Since my recent refinance, I have been inundated with offers of insurance plans that payoff in the event of a spouces death.

This option certainly sounds like protection that I should consider but don't know anything about it and what I have googled is information on mortgage insurance protection for the lender.

Any experience on this issue?

Thank you.

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gandbb

Most people think that if you aren't required to have mortgage insurance it isn't something that you want. Why not just insure yourself for the amount of the mortgage - that way your spouse could use the money any way he/she wants to. Flexibility is a valuable commodity, especially after a major life disruption.

    Bookmark   October 19, 2005 at 1:33PM
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joyfulguy

If your mortgage owing at present is, say, $100,000. you owe that amount right now.

In a couple of years, as your mortgage payments are for equal amounts over a period of years, you'll owe almost as much, for most of your payment is being used to cover the interest cost.

After about ten years, the amount left owing on your mortgage is somewhat less, so less interest is needed to cover that amount, and a much larger portion of your regular payment goes toward paying off principal.

Which is a good reason to make additional payments as permitted, especially in the early years of the mortgage, for the whole amount of the extra payment goes toward paying down principal and may be almost as much as the total amount of the principal that had been paid off by your mortgage payments through that whole year.

During the later years of your mortgage, as the principal is smaller, much, eventually most of your regular payment goes toward paying down the principal.

At that time, the remaining principal is rather small, and that is the total amount of insurance that the insurance company will pay if your spouse dies. But the amount of annual premium almost always remains constant.

Many advisors say that it's best to skip the mortgage insurance, on which premiums are often rather high, and just go for regular insurance.

That way, as the remaining amount owing on the principal decreases, the amount of insurance carried remains the same, so there'll be some extra left for you to use for other purposes.

In many cases, I think that you'll find that buying a larger amount of term insurance (which mortgage insurance is) may not be more costly than purchasing mortgage insurance.

As a matter of fact, most families when they are young need quite a bit of insurance, to provide for not only paying off the balance owing on the house mortgage, but to provide for the ongoing living needs of the bereaved over a number of years, possibly including part of the cost of university, etc. (at higher rates than currently, allowing for inflation).

As the years go by, there are fewer years to care for the chidren until they are educated and independent and fewer years to care for the surviving parent, so decreasing face value of term insurance is often a wise choice - but for a much larger original amount than solely to cover house mortgage retirement.

Good wishes as you make your decision.

ole joyful

    Bookmark   October 19, 2005 at 3:38PM
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mustangs81

Thank you both for taking the time to respond. It's certainly somethings to think about.

    Bookmark   October 20, 2005 at 1:00AM
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joyfulguy

Mustangs,

You're a car buff, I assume?

Any more questions, just ask.

I didn't say before that I am not nor have I been related to an insurance company.

In fact, I have some biases against the usual life insurance system, the ones that push whole life policies, especially.

You're betting you're gonna die: they're betting you're gonna live.

They're the ones with the actuaries.

Good wishes as you make your plans.

ole joyful

    Bookmark   October 20, 2005 at 2:32PM
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cowboyind

I agree that the specialized mortgage insurance is usually not going to be as good a deal as a regular term insurance policy. Depending on how old you are and how much coverage you want, you can often get a huge term insurance policy for a very small monthly premium.

When the lenders push those mortgage insurance policies, that's really more for them than for you. They contract with an insurance company to offer them, collect the fee, keep a portion of it as their commission for selling it to you, and then forward the rest to an insurance company. Often that means you wind up paying more for less coverage.

In addition, the insurance is earmarked solely for the purpose of paying off the mortgage, which is also in the interest of the mortgage company. In the tragic event of the death of a spouse, the surviving partner would be better off having the money from a regular term policy, which would give him or her the freedom of deciding how to spend it. Instead of paying off the mortgage, the survivor may want to move somewhere else and just keep making the mortgage payment until the house sells. In some other instances, the survivor may be better off investing the money or keeping it available for living expenses rather than paying off the house.

With insurance as with credit cards, the companies that are the most aggressive in seeking customers are often not offering the best deals. "Niche" insurance products that do a very specific thing like pay off a mortgage, or pay you if you get a certain illness, are high profit items, so they're marketed heavily. If you check Consumer Reports, you can find a list of companies offering the best deals on term insurance. The companies they recommend will offer term policies that will offer you the best way to get this type of protection at the lowest cost.

    Bookmark   October 23, 2005 at 1:38AM
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joyfulguy

Nice to hear from you again, cowboy - with useful information, as always.

joyful

    Bookmark   October 25, 2005 at 3:00PM
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