When you take out a mortgage, especially when you have less than 20% equity, most lenders require you to pay private mortgage insurance (PMI) or MIP (FHA). These policies protect the lender only and are in place in case the borrower defaults on the loan. This is NOT mortgage protection insurance.
Mortgage Protection is a separate life insurance protection policy that ensures that your family will have the financial resources to pay your home off in case of your unexpected death. There are also additional built-in features on some policies such as critical or terminal illness, where you can access a portion of it during a specified time of need.
Most people like to avoid the “life insurance” topic often before its too late. However, when you purchase a home, it is absolutely necessary. Think of it like this:
As the main qualifier or joint qualifier for your mortgage, your income was used to approve your mortgage. What happens to the monthly payments if your income abruptly ends?
An abrupt end to your income could be due to a layoff, an accident, a terminal illness that causes you to stop working, or an untimely death.
The brutal reality is that Lenders are in business to make profit. While some may be empathetic to your situation, that empathy does not extend to allowing their clients to take a break from paying their obligations. They will foreclose on your home, evict you, and contract with a REO Specialist to sell your home at full market value, without losing any sleep about the tragic situation you may be facing.
Fortunately, there are insurance plans to cover the unexpected circumstances that affect us all.
To offset a short period of time in between jobs, we recommend building an emergency fund equal to 8-12 months of your total monthly budget (all household expenses, groceries, credit obligations, home payments, insurance, etc.). When you tally everything up and multiply it by 12 the number can seem to be large but saving a percentage of each check in a separate savings account that is never touched and adding extra deposits from time to time will get you there. You’ll also want to keep those credit cards down to 1-5% of the balance and have them in case of emergency - that way you can leverage your credit cards during your time of need and tap into your emergency funds as little as possible.
There are income protection policies that will pay you a portion of your income if you become disabled. It is a form of health insurance, and qualification is based on current medical history and income. They usually have a short waiting period and elimination period, which helps to keep unnecessary claims down and premiums balanced.
This is the nuts and bolts of mortgage protection, to cover your time of need. Most people say they have life insurance through work. What happens if you lose your job? Most of the time it is group coverage and a limited amount of protection.
Even if you have life insurance, you will still additional insurance need to cover your mortgage. If something were to happen to you, mortgage protection provides your loved one the opportunity to deal with final affairs and grieve their devastating loss without having to worry about covering a mortgage payment, putting the house on the market, waiting for it to sell, etc.
The cost of insurance depends on a number of things such as age, health, cover amount, type of policy, etc. Before getting a quote it is important to think about the amount of money your family will need and whether it is for your mortgage, or to give your family financial support after you die. Think of your monthly expenses and cost of living.
A general rule of thumb for estimating how much coverage you need is multiplying your annual income by 10 for your life insurance coverage amount. This can obviously change depending on any financial goals you may currently have, such as the number of dependents – saving for college, etc. For mortgages, you can simply take out a policy that covers the total mortgage loan amount(s).
You will pay a monthly premium for the duration of your life insurance or mortgage protection.
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