By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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Unfortunately, death is not something you can believe in or not believe in - it’s going to happen to all of us. Therefore, life insurance only protects against the inevitable and can protect those we love financially. With this in mind, it’s important to recognize that not all life insurance is the same.
Mortgage insurance gets sold together with mortgage loans, but borrowers don’t always understand the details related to this type of insurance. I will clarify the disadvantages of mortgage insurance in this article and also help to define it more clearly.
Mortgage insurance is a temporary life and/or disability insurance related to a person’s mortgage balance. The mortgage lender is also the only beneficiary and everything related to claims only concern the mortgage lender and the outstanding mortgage balance and monthly mortgage payment.
When a person gets approved for a mortgage, they will most-likely also get introduced to mortgage insurance through their lender. A borrower will have the option to either apply for this insurance or waive the coverage. Sometimes, if a person is over a certain age or has certain pre-existing medical conditions, they will not be eligible for the insurance.
Cost Vs. Coverage
One of the glaring disadvantages of mortgage insurance is the declining coverage that occurs year after year, and that the premiums do not get adjusted to correctly reflect the decline of coverage.
Since the insurance only covers the mortgage balance, as a person makes their mortgage payments, it will reduce the balance. Yet, they will continue to pay the same insurance premiums for declining coverage.
With mortgage insurance, even though the borrower pays the monthly premium, and the policy is technically theirs, the mortgage lender is the only beneficiary of the policy. This differs from private insurance coverage that offers an unwavering amount of coverage and also allows insured parties to decide who their beneficiaries are.
For example, a borrower can decide who will receive the money and the beneficiary can then decide who and what it will pay from the insured's policy payout.
The common belief about life and disability insurance is the presumption that an insurance company will always pay out claims made by insured parties who made their monthly premium payments. Unfortunately, this is not the case. Insured parties must also meet their policy’s coverage guidelines to qualify, and this does not always happen for various reasons.
If there are discrepancies in a person’s health, for example, and information related to their health gets discovered by the claim adjuster that they did not previously disclose, coverage can collapse and a claim can get denied.
In contrast, insurance such as term policies or whole life insurance, for example, require a medical exam. Medical exams insure the insured party's health is verified at the beginning of the process to eliminate any inconsistencies that could jeopardize the underwriting and claim adjusting process in the future.
With mortgage insurance, there isn’t a medical exam required and usually, the insurance company only asks that a short questionnaire get answered. Unfortunately, this can backfire when a claim gets made. Issues can be discovered if the insurance company scavenges medical records for previous ailments that could ultimately disqualify coverage.
Having a medical closes most if not all loopholes that could equal non-payment of claims, and therefore, without medical exams completed at the beginning, the fate of paying out claims can dwindle.
As a mortgage agent, I am often required to present life and disability insurance to borrowers and explain the differences. In my opinion, borrowers should seriously consider all forms of insurance to ensure the money they are paying for coverage will offer the most security to their family.
I work with mortgage insurance through our lender partners and also private insurance professionals who administer different types of insurance such as whole life, term policies and so on. I usually provide a few different references for my clients to call to ensure they do receive the best insurance for their needs and within their budget.
Do you have a mortgage question?
Feel free to contact me at (647) 773-4849
Sarah A. Colucci, Mortgage Agent Lic. M14000929
Mortgage Edge, Broker 10680