Mortgage Protection Life Insurance - Federal Regulations

Mortgage protection life insurance is term life insurance sold to homeowners as a way to pay off a mortgage in the event of death. It differs from credit life insurance, which is sold at the time that the mortgage is taken out through the lender as a way to protect the lender’s interest in the event that death occurs. Credit life is a decreasing term life insurance plan that is written with a face amount equal to the amount of the loan. As the loan is paid off over time, the face amount reduces to match the amount of unpaid liability. When the mortgage loan is paid off, the face amount of the decreasing term policy is $0.

What is Mortgage Protection Life?

Mortgage protection life provides a benefit to the policy owner’s beneficiaries, not the lender. Mortgage protection life insurance should be sold as a decreasing term life insurance policy but in many cases it is sold as either a level or fixed term insurance plan or increasing term insurance.  The excess amount that the beneficiary receives can be used for other purposes, such as paying off debt.

Mortgage Protection Life versus Private Mortgage Insurance

Mortgage protection life insurance is far too often confused with Private Mortgage Insurance or PMI.  PMI is a requirement that a lender imposes on a borrower who is unable to put down a down payment of 20 percent or more on a home purchase. This results in a loan-to-value ratio that is greater than 80/20, with the 80 representing the loan and 20 the equity in the home.  When this occurs, a lender can require that the borrower take out PMI as a way to protect its interest in the event that the borrower defaults on the loan.  PMI, which also uses term insurance, will help the lender recoup its costs and any loss occurred resulting from the repossession and sale of the home.

The Homeowner’s Protection Act of 1998 required banks to automatically cancel a homeowner’s PMI requirement when the loan-to-value (LTV) ratio became 78/22. The law also required complete and full disclosures to homeowners who were under a PMI requirement in order to ensure that they understood their rights once they achieved an adequate 80/20 LTV. As a borrower makes regular mortgage payments, they increase their home equity and subsequently their LTV changes. When that ratio reaches 78 percent or lower, the lender should cancel the PMI requirement. This helps the borrower save on costs since they no longer have to pay the insurance premiums associated with maintaining the PMI.

Federal Laws Regarding Mortgage Protection Insurance

There are no federal laws that require that a homeowner purchase mortgage protection insurance. Mortgage protection insurance is federally regulated. Individual states govern the sale of these contracts and the conduct of agents and insurers who do business with the public. Be sure you choose a policy and agent wisely. Do your research and compare policies before you agree to any terms.

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