Mortgage life insurance and private mortgage insurance

The house you buy is the largest singe investment you're likely to buy during your life, i.e. it's the biggest debt you will accept. Perhaps more importantly, it will be the place you and your family call home so it's an asset worth protecting. But never forget the lender in this. When there are large sums of money outstanding, the lenders want to feel more secure so, when you first take out the mortgage with a deposit of less than 20%, there's usually a condition you also put a private mortgage insurance policy in place. This pays out if you default and the forced sale of the property fails to pay off the amount owing. This type of insurance has been a little controversial with some lenders collecting the premium at the same premium rate throughout the entire period of the loan. When the actual amount owing reduces year-on-year, there will always come a point when a foreclosure is going to realize enough to pay off whatever is outstanding. The lenders were therefore using this form of insurance as an additional profit center. With the Homeowners Protection Act of 1998, Congress outlawed the practice. As soon as you have paid down to loan to 80% of the value of the property, you can request the lender to cancel the policy. Once the percentage falls to 78%, the lender is legally obliged to cancel the policy.

Independently, you can buy mortgage life insurance. If you as the borrower pass away while the mortgage is outstanding, the insurer pays off the outstanding balance. This protects your family's right of occupation without having to worry about finding the monthly installment. If you have free-standing life insurance cover in place, why should you want to buy a separate policy to protect the mortgage. Your family will get a large lump sum and can use that to pay down or pay off the mortgage. There are two factors in play here. The first is the question of practicality. It's easier to buy mortgage life insurance than a free-standing policy. The health requirements are less demanding, often because these policies are marketed by the lenders. So if you know you will have problems in buying a conventional life insurance policy, you should seriously consider buying this limited policy. At the very least, it will pay off your biggest debt should you pass away young. However, you may get the same advantage from term life insurance without the higher commission paid to the lender acting as broker.

So before you buy mortgage life insurance, consider the health issue and do a needs analysis. Look at the big picture. If you're likely to get a conventional life insurance policy, how much money is your family likely to need to deal with the loss of your income? The general conclusion will be it's not worth buying mortgage life insurance. You can deal with the mortgage as part of the overall financial protection.