What Is Mortgage Life & Disability Insurance?

by Cynthia Myers

Mortgage life and disability Insurance -- also known as credit life insurance or mortgage protection insurance -- covers your mortgage payments if you are unable to do so. Some policies pay only if you die while others make payments if you are disabled and or if you lose your job. Mortgage insurance may be offered by the lender through which your home is financed, but you may also shop around for the best policy.

MPI vs. PMI

Mortgage protection insurance is not the same as private mortgage insurance. The latter is the insurance that lenders require you to purchase if you put less than 20 percent down on the purchase of a home. If you default on your mortgage payments, PMI pays the bank. No law requires you to purchase MPI, and if you default the insurance pays nothing. It’s designed only to ensure that the lender is paid if you die or become disabled.

How the Insurance Works

If you become disabled or lose your job and you have the type of mortgage insurance that covers these events, you will apply to the insurance company with proof of your unemployment or disability and it will begin sending principal and interest payments to your mortgage holder. Mortgage insurance typically does not cover costs such as real estate taxes and property insurance, so you’ll be responsible for those on your own. The type of mortgage insurance that covers disability and job loss typically makes your mortgage payments for a defined period of time, such as one year. At the end of that time, payments stop, but this can give you time to sell or refinance the house, or to find another way to make the payments. If you die, your heirs will send proof of your death to the insurance company and the company will pay off the mortgage, sending the payment directly to your mortgage holder. Your heirs will then own the house free of any mortgage debt.

Cost

The cost of mortgage life and disability insurance, like other insurance, depends on your age, health, occupation and other factors. A person with a dangerous job may expect to pay more for the insurance, as could an older person or one in poor health. Healthy young people, who are statistically the least likely to suffer a debilitating injury or illness or death, get the best rates. The cost of the insurance also depends on the size of the mortgage. Purchasing insurance for a $1 million mortgage costs considerably more than insurance for a $100,000 mortgage. A quote for mortgage insurance represents a set monthly or yearly cost for the life of the policy, which is the same as the life of the mortgage. As you continue to pay your mortgage over a number of years, your equity increases and your mortgage debt decreases, but your payments to the insurance company remain the same.

Who Can Purchase

Anyone with a mortgage who can afford the premiums may usually obtain mortgage disability and life insurance. If you’re ineligible for regular health and life insurance due to a health condition, mortgage disability and life insurance is one way for you to provide protection for your family. Terms of mortgage insurance policies vary. Make sure the policy you choose doesn’t exclude death or disability due to pre-existing conditions.

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