Insurance description
Mortgage Life Insurance refers to a
insurance policy that guarantees repayment of a mortgage
loan in the event of death or, possibly, disability of
the mortgagor. Private Mortgage Insurance or PMI refers
to protection for the lender in the event of default,
usually covering a portion of the amount borrowed. There
are Government loan products that also include a
Mortgage Insurance Premium or MIP.
For example, Mr. Smith obtains a mortgage loan that
exceeds 80% of his property's value and/or sale price.
Because of his limited equity, the lender requires that
Mr. Smith pay for mortgage insurance that protects their
institution against his default. To obtain a mortgage
loan insured by the Federal Housing Administration, Mr.
Smith must pay a mortgage insurance premium (MIP) equal
to 1.5 percent of the loan amount at closing. This
premium is normally financed by the lender and paid to
FHA on the borrower's behalf. Depending on the
loan-to-value ratio, there may be a monthly premium as
well.
Types of Mortgage Insurance
Private Mortgage Insurance (PMI) is default insurance on
conventional loans, provided by private insurance
companies. The Homeowners Protection Act of 1998 allows
PMI to be canceled when the amount owed reaches a
certain level, particularly when the debt is less than
80 percent of the home's value, and automatically when
the loan principal is less than 78 percent of its
original cost. Mortgagee's Title Insurance is a policy
that protects the lender from future claims to ownership
of the mortgaged property. Generally required by the
lender as a condition of making a mortgage. In the event
of a successful ownership claim from someone other than
the mortgagor, the insurance company compensates the
lender for any consequent loses. Mortgagor's Title
Insurance is a policy protecting the buyer/ owner of
real property from successful claims of ownership
interest to the property. The coverage usually is
supplemental to a Mortgagee's Title Insurance policy,
and the premium is customarily paid by the buyer.
Do you need it?
Who would pay your mortgage if you suddenly passed away?
Or what if you were unable to work due to sickness or
accident?
Purchasing a home is a big step – and a big financial
commitment. When you take out a mortgage your lender
expects you to make all your repayments - without fail.
Even death or illness aren’t good enough excuses.
So, if your mortgage isn’t covered by insurance, or if
you’re planning to take out a mortgage in the near
future, have a think about the following questions:
If you died, would you leave behind enough resources to
pay off your mortgage?
Would you have enough money to meet your mortgage
repayments if serious illness stopped you from working?
If you answered no to either of these questions, have
you thought about how your family would repay your
mortgage if you die, or if your health lets you down?
When you take on a mortgage it’s really important to
consider the ‘worst case scenario’ and protect your
dependents and/or partner. If your family couldn’t cope
with this debt (or if you’d rather not burden them with
it), mortgage insurance will make sure your home stays
in your family’s hands – and doesn’t go back to the
bank.
How does it work?
Most mortgage insurance packages offer a range of
different benefits. You can choose the mix of protection
benefits that best suits your needs and your finances.
There are basically 3 types of cover:
Life Cover – which pays off your mortgage if an insured
person dies. Life cover is the basis of any mortgage
insurance package – and is usually required before you
can access the other insurance types.
Mortgage Repayment Protection – this pays your regular
mortgage repayments if the insured person is not able to
work due to sickness or injury for longer than 4 weeks.
Trauma Cover – this pays a lump sum (usually either all
or part of the mortgage) if the insured person suffers a
Trauma condition (like life threatening cancer,
paralysis, stroke, etc).
Is mortgage insurance the right option for you?
Mortgage Life Cover and Repayment Protection, aren’t
dissimilar to ‘normal’ life insurance and income
protection. Price wise (for equal levels of cover) they
are usually pretty much the same. However, the biggest
difference is that mortgage insurance options aren’t as
flexible – because any claims paid go directly to the
mortgage lender. For some people, this has a couple of
downsides:
Your family doesn’t have any choice about what the money
is used for.
It can cover your mortgage, but can’t be used for any
other purpose (e.g. pay off other debts, provide a
‘replacement’ income, cover funeral costs, and so on).
If your only concern is your mortgage, then mortgage
insurance is a great option. If, in addition to your
mortgage, you have dependents and financial
responsibilities, you should consider ‘normal’ life
insurance and income protection. |
