Mortgage Life and Disability Insurance

Every few days, I get junk mail wanting me to buy Mortgage Life and/or Disability Insurance.



Buy regular policies instead.



These are not, in general, good policies of insurance, because the benefits go straight to someone else.



Mortgage Life Insurance is straightforward enough. It's decreasing term insurance - the insurance company's favorite kind of policy. As it goes along, the payments stay the same, but the coverage decreases as you pay off your mortgage. The problem is that until you get into your sixties the cost of insurance per thousand dollars should not increase swiftly enough to counterbalance the fact that you are theoretically paying your mortgage down. Not to mention the fact that level term policies exist for about the same amount of money, and that term is a poor form of life insurance in the first place.



The idea is that if you croak, the mortgage gets paid off. As in the money goes straight to the lender. Well, even assuming that you don't refinance, this is a bad deal for your family. Let's look at the situation, and the time value of money. I keep using $270,000 as a mortgage amount, so lets stick with that. Assume you have a 7 percent thirty year fixed rate. Or you can invest the money and keep paying the mortgage out of the proceeds. You pay the loan off, and your family have nothing, while still needing to come up with property taxes and homeowner's insurance and maintenance money. But let's say you put it into a variable annuity that earns a net of 9% (the market does 10-13 over time, depending upon who you ask). Your monthly payment is $1796.32, and adding reasonable amounts for property taxes and homeowner's insurance, it goes to about $2170 per month. You end up with 363 months of payments - 3 months more than you could possibly need. On a forty year schedule of payments ($2050 monthly PITI payment), the money would actually last 590 months - an even better situation. So instead of having nothing and needing to come up with money every month, your family's housing needs are completely taken care of, with a bit left over, and that's on a somewhat pessimistic projection. Even if the fact that the market isn't even over time messes them up, at a minimum they've got many years of making the full house payment before they have to think about selling. Additionally, they have the option of using some of the money for other things like say, college for the kids so that they can support the surviving spouse. Or college for the spouse, so that they can support themselves. One hopes that you get the idea. Furthermore, if you have a regular policy of life insurance, your family can always choose to use it to pay off the mortgage. With mortgage insurance, you do not have that option. I can tell stories of people who had it, and the family lost the house anyway because they didn't have the cash flow for the other expenses of owning a home.



Mortgage Disability Insurance is the same concept, applying to disability insurance instead of life insurance. If you are disabled, it makes your payment after some elimination period (the elimination period is the time after you qualify but before you receive benefits - short elimination periods are expensive!).



This has two problems, same as mortgage life insurance. First off, that's a horrible way to allocate tax-free money - straight to anyone else. The second problem, unlike mortgage life insurance, is that it's not enough money. Disability insurance should replace fifty to sixty five percent of your income, depending upon your situation. Depending upon the lender and the program, maximum qualifying debt-to-income ratio is 36 to 50. This is a total of all debts, including mortgage, property taxes, insurance, and any other monthly obligations like credit cards, car payments, etcetera. All mortgage disability pays is your actual mortgage loan payment, and it shouldn't take a mathematical whiz to see that this is clearly going to be insufficient unto the task. You're going to need another policy anyway, so why not just buy one good one and save yourself a second set of administrative costs?



Caveat Emptor.