Mortgage Insurance Coverage Options and Features

Mortgage insurance coverage is designed to provide a lender with a way to recoup the remainder value of a mortgage loan in the event that a primary insured dies. This type of insurance should not be confused with primary mortgage insurance or PMI, which is required coverage for borrowers whose home’s loan-to-value (LTV) is below 80 percent. PMI protects lenders from loan default risk up until the time the home has sufficient equity (exceeding 80 percent LTV).

Mortgage insurance is usually optional coverage that a lender offers. It is also referred to as credit life insurance and is written as a decreasing term insurance policy. During the term of the insurance or loan (i.e. 15, 20, 30 years) the death benefit amount decreases to reflect mortgage payments being made. At the end of the period, the policies death benefit should be equal to $0.

Several options and features can be considered when purchasing mortgage insurance to provide additional benefits for your family or pay benefits in the event of your disability.

Disability Waiver of Premium

Disability waiver of premium provides a way for the insured to continue to pay insurance premiums in the event of a disability. This policy option should be attached to any insurance policy in order to remove the concern of what may happen to your insurance coverage if disability occurred during the period premiums are required.

Advantage

•Gives peace of mind during the period insurance premiums are payable.

•Helps keep the coverage in-force until you are able to work again or are no longer disabled.

Disadvantage

•As a policy option, it will require additional premium in order to include the rider.

•The rider is only good typically until age 65; if premiums are still payable, you will need to resume paying them, even if still disabled.

Additional Insured

An additional insured option allows you add another person, typically a spouse to the policy for a reduced benefit amount. This may be important in the case where the death of a non-working spouse may cause financial hardship for you as you seek ways to replace the loss earnings of the deceased spouse.

Advantage

•Provides you with a benefit to replace a portion of loss earnings due to the death of a spouse.
•This benefit can be used to offset the mortgage balance or pay off other debts.

Disadvantage

•This option will require the spouse to meet the underwriting requirements for the policy in order to qualify.
•There is an additional cost associated with adding this option to the policy.

Excess Benefit

An excess benefit option is similar to the additional insured option in that it provides an amount to the insured’s beneficiaries above the amount used to pay off the mortgage. This type of coverage is a decreasing term policy with a level or increasing term insurance rider. When death occurs, the lender receives the amount from the decreasing term portion and the excess amount goes to the beneficiaries of the insured to pay other obligations or provide for any unmet need.

Advantage

•This provides a way for a family to obtain additional coverage above what may be offered through an employer’s group plan.

Disadvantage

•This benefit will result in additional costs to you in order to include it on the policy.

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