Life Mortgage Insurance: Disability Coverage?

Term life insurance does not cover disability by default. However, you can add disability riders to your insurance policy to cover circumstances where you are injured or ill and unable to earn an income. These riders can provide a monthly income to cover mortgage payments, or pay out a lump sum to cover your mortgage in the event of your death.

Mortgage life insurance vs mortgage disability insurance

Mortgage life insurance and mortgage disability insurance are two distinct types of insurance policies that offer financial protection in different scenarios. Here is a detailed comparison between the two:

Mortgage Life Insurance:

Mortgage life insurance, also known as mortgage protection insurance, is a type of life insurance policy specifically designed to cover your mortgage debt in the event of your death. The key features of mortgage life insurance include:

• The beneficiary of the policy is the mortgage lender, not your family or loved ones. The insurance payout goes directly towards paying off the remaining mortgage balance.
• The policy's value decreases over time as you pay off your mortgage, but the premiums typically remain level throughout the term.
• It is usually sold by the mortgage lender or an affiliated insurance company and can be purchased when you buy the home or shortly after.
• It does not require a medical exam, making it accessible to individuals with health conditions who may struggle to obtain traditional life insurance.
• It offers peace of mind and ensures that your family will not lose their home if something happens to you.

Mortgage Disability Insurance:

Mortgage disability insurance provides financial protection in the event that you become disabled and are unable to work due to an accident or illness. Here are the key features of mortgage disability insurance:

• It compensates for the loss of income by covering all or part of your monthly mortgage payments while you are unable to work.
• The benefit is typically paid as a monthly sum, up to a certain maximum amount, for a specified period or until you reach a certain age.
• It helps maintain your quality of life by ensuring you can continue paying your mortgage and other everyday expenses during your disability.
• It is separate from any workplace insurance or benefits and can provide additional financial protection.
• It is available from mortgage lenders, private insurance companies, or financial security advisors.

Comparison:

While both types of insurance offer valuable protection, they serve different purposes. Mortgage life insurance ensures that your mortgage is paid off in the event of your death, providing peace of mind and financial security for your loved ones. On the other hand, mortgage disability insurance focuses on covering your mortgage payments if you become disabled and cannot work. This type of insurance helps maintain your standard of living and provides income protection during a difficult time.

Mortgage disability insurance riders

• Return of premium: This rider requires the insurance company to return your premiums at the end of your policy if you don't file a claim. This rider is costly and can double your premiums.
• Involuntary unemployment: The rider waives premiums for a period if you're "involuntarily unemployed". The longer you're eligible for premium waivers, the more you can expect to pay for this rider.
• Homeowner-related expenses: The rider helps you with costs that go beyond your mortgage payments, such as helping you with homeowners' insurance and real estate taxes. However, it won't help with credit card bills, auto insurance or other regular costs.

There are also other types of riders that can be added to term or whole life insurance policies at the time of application to provide additional protection in the event of disability. These include:

• Total Disability Waiver of Premium Rider: Under this rider, life insurance premiums are waived if the insured suffers a permanent total disability. This covers disabilities due to accidents and illnesses. To claim under this rider, the insured must be unable to perform the essential duties of their occupation, not be engaged in any other occupation, and be receiving medical care for the condition that has caused the total disability.
• Disability Income Rider: A Disability Income rider provides monthly payments to the insured in the event they become disabled and unable to work. The policyholder will need to choose the time period for which the payments are to be made and the monthly payment amount (which is usually capped). This rider typically has a 30 or 90-day waiting period, with retrospective payments starting after the waiting period.

Pros and cons of mortgage disability insurance

Pros of Mortgage Disability Insurance

• Financial security: This type of insurance provides financial security during a period of disability. If you are unable to work due to an injury or illness, mortgage disability insurance will cover your mortgage payments, ensuring your home remains protected.
• Peace of mind: Knowing that you have a safety net in place in case of a disability can provide peace of mind. You won't have to worry about meeting your financial obligations while dealing with a health crisis.
• Maintains homeownership: Mortgage disability insurance helps you maintain homeownership even during a disability. You won't risk losing your home due to missed mortgage payments.
• Simplified claims process: The claims process for mortgage disability insurance is often straightforward, making it easier to access benefits when needed.
• Various coverage options: Insurance providers offer a range of coverage options, allowing you to tailor the policy to your specific needs and budget.
• No medical exam: Mortgage disability insurance typically does not require a medical exam and may have no health questions, making it more accessible for those with medical conditions.

Cons of Mortgage Disability Insurance

• Cost: One significant drawback of mortgage disability insurance is the cost. Premiums can be relatively high, especially if you have pre-existing health conditions, and can add up over time.
• Coverage limitations: Mortgage disability insurance usually has coverage limitations and may not cover all your living expenses, such as utilities, groceries, and other bills. You may need to supplement it with other forms of disability insurance.
• Eligibility and pre-existing conditions: Eligibility for mortgage disability insurance may depend on your health and employment status. Pre-existing medical conditions may result in higher premiums or even disqualification.
• Coverage exclusions: Policies may have exclusions and waiting periods, meaning you may not be eligible for benefits immediately after purchasing the insurance.
• Limitations on the type of disability: Some mortgage disability insurance policies may only cover specific types of disabilities, limiting the scope of protection.
• Decreasing coverage: As you pay off your mortgage, the insurance coverage decreases, even though your premiums remain the same.

How to get mortgage disability insurance

Mortgage disability insurance is a type of mortgage protection insurance (MPI) that covers your mortgage payments if you are unable to work due to injury or illness. It is different from regular disability insurance, where the benefits are paid directly to you, and can be used for any purpose. With mortgage disability insurance, the payments are made directly to your lender.

Where to Get It

You can obtain mortgage disability insurance through your mortgage lender after closing on a home, or by applying directly to an insurance provider or agency. Many lenders offer MPI directly to borrowers. You can also get a policy from a private insurance company or a life insurance provider, which may refer to it as "mortgage life insurance".

Who Should Get It?

Mortgage disability insurance is ideal for people in high-risk occupations, such as roofing or fishery, who have a greater likelihood of injury on the job. It is also suitable for those who don't have existing disability coverage through work, or cannot get traditional long-term disability coverage.

Pros and Cons

Mortgage disability insurance can reduce the risk of losing your home if you become disabled and are unable to work. It is usually available without a medical exam and/or medical questions, and policy payouts are tax-free. However, it is not as comprehensive as traditional long-term disability coverage, and you pay higher premiums for less coverage. The coverage also often decreases as you pay off your mortgage balance, even though your premiums remain the same.

Cost

The cost of mortgage disability insurance is based on your age and the size of your loan. You might have to pay a certain amount for every $100 of your loan, which can be expensive if you have a large mortgage.

Mortgage disability insurance cost

Mortgage disability insurance is a type of mortgage protection insurance (MPI) that covers your mortgage payments if you are unable to work due to injury or illness. It is important to note that this type of insurance is different from private mortgage insurance (PMI) or mortgage insurance premium (MIP), which protect the lender, not the borrower.

The cost of mortgage disability insurance varies depending on the insurer, the size of your loan, and your age. You might have to pay a certain amount for every $100 of your loan, which can be expensive if you have a large mortgage. Alternatively, your total balance may include the cost of your coverage. In both cases, you could end up paying more than expected if interest is added to your mortgage balance.

Mortgage disability insurance is typically offered by your mortgage lender when you take out a loan, but it is not mandatory to accept it. It is worth considering if you are in poor health or have a high-risk job and cannot qualify for regular disability insurance. However, it is generally recommended to get regular disability insurance instead, as mortgage disability insurance has some drawbacks. Firstly, it only covers mortgage payments, while regular disability insurance can be used for any expenses. Secondly, the potential coverage decreases as you pay off your loan, even though your premiums may remain the same. Lastly, the lender is the beneficiary of mortgage disability insurance, whereas regular disability insurance pays out directly to the policyholder.

Frequently asked questions