If you are a homeowner who recently closed on a loan or refinanced a mortgage, then it is likely that you have been inundated with offers for “Mortage Protection” or “Mortgage Life Insurance”. The letters appear official — as if they are sent by your lender — but in 9 out of 10 cases, they are not. Often times, your lender will partner with an insurance company and send out an offer for Mortgage Life Insurance, but these are far outnumbered by the others. At the bottom of the letter, there is a disclaimer stating that the loan information was obtained from public records. Anyone can obtain these records and in Georgia (especially Atlanta), there are numerous life insurance agencies marketing to homeowners.
What exactly is Mortgage Protection Life Insurance?
Basically, it is a life insurance policy designed to pay off the mortgage balance in the event of the death of the homeowner. Often times, the policy has a decreasing benefit (face) amount that decreases in direct proportion to the decreasing liability of the borrower. Sometimes, the lender is named the beneficiary of the policy to protect against loan default. More commonly, the policyholder names a spouse or someone else as beneficiary so that they can pay off the mortgage in one lump sum or continue making mortgage payments.
Many Mortgage Protection policies also offer riders (additional features) that include disability insurance and Return of Premium. The disability insurance benefit is designed to pay the m0nthly mortgage payment in the event of the homeowner’s disability — the inability to work due to injury or illness. The disability riders are not as strong as most disability insurance products, but that is another topic altogether. The Return of Premium (ROP) rider refunds the premium paid if benefits are not used by the end of the mortgage term (usually 30 years). It is important to read the fine print when selecting this rider because ROP riders vary considerably.
Most of what has been written about Mortgage Protection Insurance has been critical, however, these products can work for some people as described below. What I really like is that these offers send out a good message – a needed reminder – that your mortgage is a very large debt and adequate life insurance coverage is needed to protect your loved ones.
The Bottom Line:
Mortgage Protection Life Insurance is not a good deal for the vast majority of people. The rates tend to be substantially higher than level term insurance products. A good, low-cost 20 or 30-year term policy will provide the protection one needs (Term Quotes available at www.insuranceadv.com). Life insurance carriers will allow the face amount of the policy to be lowered by the policyowner as desired. This can be helpful as the need for life insurance decreases over time (as the mortgage and other debts dwindle). Periodically lowering the face amount can also save money spent on premiums. For more information on this strategy, see laddering life insurance post.
Mortgage Protection is just a neatly packaged way to offer life insuance. Some would say it is gimmicky and in some cases they are right. The offer received in the mail can sometimes be misleading. However, there are many agents who market to new homeowners, recognizing their potential need for additional protection. And sometimes they offer legitimate products that can serve the homeowner well.
Why does Mortgage Protection cost so much?
For those who want to know precisely why Mortgage Protection Insurance costs more than level term insurance, the following explanation should suffice.
Mortgage Protection Life Insurance is typically sold as a “Non-Medical” product. Non-medical means that no physical exam (blood,urine samples, etc.) is needed to qualify. The insurance company makes the application process simple and quick by asking a limited number of health questions. Mortgage Life Insurance is generally sold with just two undewriting classifications: Standard Smoker and Standard Non-Smoker. Most companies offering medically underwritten term life insurance offer three or four Nonsmoker (NS)underwriting classifications, e.g. Standard NS, Standard Plus NS, Preferred NS, and Preferred Best NS. So, for someone in excellent health the rate for Preferred Best NS will be considerably less than Standard NS. For a non-smoker who may be overweight and taking medication for Hypertension, they might qualify for the Standard NS rate.
It wouldn’t make sense for a very healthy person (normal weight, and no medical issues) to apply for Mortgage Protection Life Insurance because they would be forced to pay the same rate as others who are less healthy. There are exceptions to this rule, but this is one reason why Mortgage Life Insurance isn’t a good option. If someone has health concerns and does not want to get a physical exam, then this could be the way to go. In that case, it would be best to check out the other Non-med life insurance products on the market.
If you have more specific questions, please comment below or email me: greg@insuranceadv.com or call 678-236-1600
My wife and I applied for a policy last evening, and when I asked for a copy of the documents we signed, we were told that we could not have one. The guy also would not e-mail us a copy of the premium and premium return numbers he showed us on his laptop. The whole thing seemed kind of shady… He said it was a contract, seemingly (I believe) insinuating that it would be able to be enforced, but without having a copy of it, I feel like I am kind of taking his word on a few things.
This guy also said he worked for a subsidiary of The Hartford. My wife had written down the name Ameritrust, but the conditional receipt he left with us last night mentions only a group called Transamerica. The whole thing feels kind of shady.
The whole thing feels kind of shady. Does this sound at all normal? Is there any way I can try to investigate the agent that you could recommend?
This appears to be for an insurance policy that has a premium return at the end of 20 years. We can get the money if something happens to one of us in 20 years, or if we have a terminal illness, or at the end of 20 years, we can file for a return of premium.
In the initial consult, the salesman did not mention that there were some health conditions/exams associated with it, and when my wife tried to mark that she had brain surgery 5 years ago for the question that asked if we had had any diagnostic tests in the last five years, the salesman told her not to worry about it. Naturally, we are also concerned about what would happen if we had to file a claim on her and it were related to some sort of neurological catastrophe.
Again, the whole thing feels rather shady. Premium for two people in late 20s/early 30s totaled about 80 bucks per month. Please let me know your thoughts. At this point, I am considering pulling the plug.
First off, you can find out some basic information about agents at your state’s Dept. of Insurance website. For Ohio, go to http://www.insurance.ohio.gov/Pages/default.aspx and click on the Agent/Agency Locater. You can see if the agent is active and how long s/he has been licensed in your state.
When at your home, agents can’t always leave copies of documents you sign, but they should be willing to provide copies by fax or email the next day. If they say that copies can’t be provided or they don’t follow through with your request, then I would withdraw the application. Any illustrations that are shown should definitely be available for you. You have to be careful with Return of Premium (ROP) Riders, because they can vary in how the premium is actually paid back. Yes, you will receive the entire premium you paid at the end of the term period (barring any claims), but if you cancel the policy in the 20th or 25th year on a 30-year term product, you might receive only a very small percentage of the premiums paid. It is important to see the ROP numbers and read the fine print. Sometimes, these can be a very good deal on 30-year term products, but make sure you see all the policy details.
Also, the financial strength and stability of the company becomes even more important when selecting a ROP product.
A copy of the application and ROP illustration will be included in the contract (policy), so you will have a free-look period to review everything carefully. If there is anything you aren’t comfortable with, call the agent or the life insurance company and have them answer all your questions.
I’m not sure about Ameritrust, but the other carriers you named — Transamerica and The Hartford are good companies. The relationship between the companies should have been clearly explained to you. It is important that you know who is actually underwriting the insurance. As mentioned above, don’t go with a sub-par company. The agent should be willing to provide you with the carrier’s ratings; not just AM Best ratings, but also S&P, Moody, Fitch, and the Comdex score.
I’m not a big fan of the “one-call deal” … it is better to review the information the agent leaves with you and then if you decide to move forward, he can return to take the application. There are plenty of exceptions to this rule. If the agent provides quotes and information before the meeting and you have time to make an informed decision, then one visit will often suffice … and save time.
Make sure you look at other comparison quotes … look at other ROP quotes and ask plenty of questions. An experienced life insurance agent can help you with this process. There may be a low cost term policy that would be more than adequate. Without knowing your overall situation (i.e. current coverage, risk tolerance, other debts, income, etc.) it is difficult to advise you properly.
Usually ROP products work best with a 30-year term policy, not 20-year. It’s hard to say if the premium is high w/o knowing the face amount. Remember you would get the entire premium back at the end of the term period. As mentioned earlier, you should get quotes on level term products and ROP term products. If the 20-year term products only cost $40/month, consider how much you could earn in 20 years by investing the other $40 each month. It would be important to ask additional questions to give the appropriate recommendation.
The product you applied for will be medically underwritten. It’s difficult to say how your wife’s medical history will affect the underwriting outcome. The agent should ask specific questions and then do a prescreen: See my post on The Right Way to Apply For Life Insurance.
I hope that helps … pls email back if you need any clarification.
Thanks,