It’s pretty slick. You want to buy or refinance your home, you’re worried about the economy, and of course there’s always someone looking to prey on those fears. Don’t let them.
But you want to be a good guy, right? A smart guy! So what’s wrong with “protecting” your loved ones from being brutally tossed from the family home in the event of your disability or death? It would be short-sighted or hard-hearted to do otherwise, right?
Wrong.
Mortgage life or disability insurance isn’t the mortgage insurance you pay if you finance more than 80% of your home’s value. That’s required by lenders for their protection, not yours. But what if you want protection for yourself? Shouldn’t you buy mortgage life insurance?
Interviews with state insurance commissioners, home lenders, private actuaries and insurance company executives reveal mortgage life insurance to be a high-dollar, high-profit business for financial institutions that sell it.
Unlike most forms of insurance, its pricing to the homeowner is set through what regulators call a “reverse competition” process. That means that the most expensive insurance policies are most likely to be offered to you because they pay the most generous commissions. The comparison-shopping is done by the lending institutions who search for the best deal for themselves–not by the homeowners who pay the monthly premiums.
Commonly the best deal means a lump-sum commission of 30 percent to 40 percent of your first year premium directly into your lender’s pocket. On top of that there may be bonuses or other compensation, plus 15 percent to 20 percent commissions on your annual premiums for the length of your mortgage.
Mortgage life insurance policies guarantee that in the event of your death, the full principal balance of your loan will be paid to your lender. The attraction is that your family or heirs will be relieved of the heavy financial burden of paying off the mortgage or being forced to sell the house. Premiums can be included in your monthly mortgage payment, making it very convenient for you to give your money away. It’s a popular product: As of 2008, according to the American Council on Life Insurance, $57 billion of coverage was in force nationwide.
The president of the National Association of Insurance Commissioners claims that mortgage life insurance is often “overpriced” and even “abusive” to homeowners. His group recently finished a two-year, national study and discovered that an average 38.8 percent of annual premiums paid on such policies benefited consumers in the form of claims payments. That’s very low. And it’s worse in some states, such as Louisiana. There, seventy-five cents of every premium dollar went to the insurance companies and only twenty-five cents was paid in claims.
On normal term life insurance policies, this payout is typically 50% to 70%.
So the bottom line is that, however persuasive the sales pitch is, you are far better off insuring your life or income through conventional insurance channels. If your family will need money to pay off a mortgage if you die, get regular life insurance. You’ll pay a lot less for it.
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(10 votes, average: 4.9 out of 5)
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Thank you for clearing this up - it sounded like a good idea, or at least one that you could argue in favor of. When you pick it apart though the reverse competition aspect stinks. Thanks.
As always, it pays to shop and compare. If everyone did that, very few would end up with inappropriate or overpriced products. Just like shopping for a mortgage makes it more likely that you will get a fair offer.
Well-said. It’s amazing how many people come to me looking for mortgage insurance. They have been inundated with advertising by the mortgage industry and are looking for that product. I always persuade them to just purchase regular term insurance. When they see the price difference, they’re usually amazed.
Yes, well it seems that the more fear generated by the economy, the more “experts” come out from under rocks to take advantage of it. Glad there are still “good guys” who are still getting business with good service. Thanks for your comment.
Gina
It’s amazing how many people still fall for this scam. Term life insurance is priced much more competitively than mortgage insurance and provides level coverage for a period of time, as opposed to a decreasing amount to “follow the mortgage.”