So, you finally got your mortgage approved and the lender says to you, how about some insurance? Since the lender was so wonderful with your loan, you listen carefully and decide right there and then to take a so called mortgage disability insurance plan through that same lender (and often mortgage life too). Is it the right thing to do? I would venture to say that most time it is.
First of all, when I ask people about the disability insurance plan they got through their mortgage lender, they have no idea what coverage they really have. It may seem crazy unfortunately common.
What to look out for with disability insurance offered by mortgage lenders?
- First of all, the plan is not really yours. In other words, when you joined the insurance program through the lender you became part of a certificate. What that means is, you became part of a group of people who also took out a policy with that same lender. So, if the lender sales the loan the new lender may not want to continue the insurance. Or if the lender decides to discontinue the offer, then you no longer have mortgage disability insurance coverage.
- Second, sometimes the mortgage disability insurance plan does not cover you for disabilities that resulted form an illness. In other words, some of those disability insurance plans only paid in case of an accident!
- Last, assuming that the plan does cover you for anything and everything, the benefit period often is only two years. What that means is that if you become disabled, then your mortgage payments will only be covered for two years. A little short don't you think? Particularly, since most mortgages are 15 to 30 year mortgages.
Is there ever a time when the mortgage disability insurance plan through a lender is a good thing to do? The answer is yes. There may be some other convincing reasons but these are the top two we have encountered. If you are not in good health and nothing else is available, then the disability insurance plan through your mortgage lender may be a great idea. If you do not think that you will take the time to get anything else (that is a bit like being responsible because you are irresponsible), then take the plan offered by the lender and we hope you will quickly replace the lender's insurance with something more adequate.
What other options are best for a mortgage disability insurance plan
The answer is actually very simple, get an individual disability insurance plan from a reputable company. Here are the main reasons:
- If you get your own plan, the only one who can cancel the plan (assuming no fraud is involved) is you. So now you don't have to worry about your lender canceling the coverage and on the other hand, you can decide to cancel your loan and refinance without any worries about your disability insurance coverage. No need to worry about higher premiums every time your loan changes, no worry about re-qualifying (medically) and no worry about what the new plan you may qualify for will offer.
- When you shop for your own plan, I am sure (or I hope) that you will get a plan that is more adequate to your mortgage insurance needs. In other words, if you have a 15 year mortgage, you will select a plan that covers that need. I hope that you will get a mortgage disability insurance that does not just cover your mortgage in case of a accident related disability but rather one that will cover you no matter happens.
- How about riders? What are those? Well the details of riders for a disability insurance policy is beyond the purpose of this article but important nonetheless. So, I will just say this. Riders can be specific to the needs of mortgage disability insurance. By riders I mean, additional benefit your disability insurance plan offers (lenders don't offer these) that will enhance the plan you have selected. An example would be the retroactive injury benefit rider, or the hospital benefit rider, or the return of premium rider.
By the way, one good reason people select the return of premium rider is because, it can unable someone to pay off their mortgage early using the cash back feature offered by that rider. Please also keep in mind that the riders mentioned above can come under different names. I only want to make you aware of the options of riders so that you may ask about them as most people do not seem to.
A few facts about becoming disabled and mortgages
According to the US Department of Housing and Urban Development, nearly half of all foreclosures are caused by disability. On top of that, according to the Social Security Administration, one in five people suffer long-term disability before the age of 65. If you put two and two together, it's pretty clear that disability is one of the most significant threats to your home.
Don't let yourself become a statistic. With a mortgage disability insurance plan in place, you can rest assured that your home is paid for regardless of your health (assuming you get the right plan). If illness or injury should occur (note that I said illness OR injury), you can focus on recovery instead of worrying about how the mortgage bill gets paid.
We hope this article gave you a better understanding of the plans available for
mortgage disability insurance. When it comes to insurance at least, most information is free and so are questions to an advisor. Irregardless of who you select for your insurance needs, as we say in all of our articles, ask, ask and ask more questions about the plan you choose. Be well.
