There are several different types of mortgage loan insurance available, and even two mortgage loan protection insurance policies marketed under the same name can come with widely different terms and conditions, so it is very important to check out the policy in detail before you accept any offer of mortgage loan protection insurance.
If you make any changes to your mortgage loan, e.g. increase the loan or refinance the loan, it is very important to make sure that this doesn’t somehow invalidate your existing mortgage protection insurance. It is also important that you make sure that you get the best possible interest rate for you mortgage loan. A good way is to compare mortgage interest rates from different banks.
Mortgage protection life insurance
This is a type of life insurance that will pay out if the insured person dies. It is a popular choice among families where the death of one or both breadwinners would make it difficult for the family to keep making the mortgage loan payments.
Generally speaking, this type of insurance will pay off the mortgage in full if the insured dies. (The payment will be made directly to the mortgage loan provider.) Always check the details of the policy you’re offered though, because some policies work differently.
Just as with a standard life insurance policy, the mortgage protection life insurance policy may have rules that disqualify certain deaths form payment, e.g. suicide and certain high-risk activities.
Mortgage protection disability insurance
This is an insurance policy that will pay out if the insured person becomes disabled. The exact terms for what constitutes a disability vary greatly, especially between different jurisdictions, so you need to check out what’s applicable in your region and also check with the individual insurance providers that you are interested in obtaining mortgage protection disability insurance from.
Mortgage protection disability insurance is usually of a type that will pay off the mortgage (lump sum) or of a type that will make the monthly mortgage loan payments for a limited period of time, e.g. 3 years.
Mortgage protection income loss insurance
This is an insurance policy that will pay out if the insured loses his or her source of income. Conditions apply, naturally. With a standard mortgage income loss insurance, there will be many exclusions, e.g. voluntary termination of job contract, losing your job due to gross misconduct, losing your job because of a felony, and so on.
This type of mortgage loan protection insurance is normally not of the type that pays off you mortgage in full. Instead, it is intended to help you through a rough patch, e.g. by taking care of your monthly mortgage loan payments for a maximum of 2 years or 3 years.
There is usually a limit to how may times or how frequently you can benefit from this type of insurance policy. So, if you for instance routinely face unemployment for four months every winter season, this type of insurance policy will probably be unobtainable or unsuitable for you.
Will the mortgage be paid off in full, or will the insurance company keep making payments?
As mentioned above, there are some mortgage loan insurances policies that will pay the mortgage loan in full and there are those that will only take care of the monthly mortgage loan payments for a limited period of time.
An insurance policy that will only take care of your mortgage payments for a limited period of time is usually much less expensive than policies that pay off the entire mortgage loan. Even though the protection is less comprehensive, a time-limited coverage can still be good choice if you want help to tie you over a difficult transition period, e.g. to give yourself time to sell your property and switch to something less expensive without having to rush it after being laid off or disabled.
Reduced term cover vs. Level term cover
The most common type of mortgage protection insurance policy will be one with reduced term cover. This means that as the mortgage loan is paid down over time, the insurance cover is reduced as well.
Another option is the level term cover. This gives you the same amount of cover throughout the mortgage term. Level term cover is usually utilized for interest-only mortgage loans, endowment mortgage loans and other loan-types that aren’t paid down gradually in the traditional fashion. It can also be used to provide the beneficiary with cash if the insured dies, since there will be a discrepancy between the size of the mortgage and the size of the cover. A similar insurance solution can be created where there the discrepancy goes to the insured if the insured becomes seriously ill, disabled, etc.
Getting level term cover is normally much more expensive than getting reduced term cover.
One of the appealing aspects of mortgage loan protection insurance is that many insurance providers will accept nearly all mortgage insurance applications. So, a person that finds it difficult to get life insurance, disability insurance or health insurance (e.g. due to underlying health conditions, a high-risk occupation or old age) may still be able to be approved for mortgage loan protection insurance, and without having to pay an exorbitant monthly premium.
Even though mortgage loan protection insurance isn’t the same as life, disability or health insurance, it can still help out a lot in a time of crisis. For instance, selling a property that is no longer encumbered by a mortgage loan can free up a lot of extra cash.
Mandatory mortgage loan protection insurance
In some jurisdictions, the mortgage loan provider (bank, credit union or similar) can require you to sign-up for mortgage protection insurance. This is not an insurance intended to protect you, it is an insurance policy where the lender is the beneficiary and will receive a payment form the insurance company if you are foreclosed on. Requiring this type of insurance is especially common for mortgage loans where the lender doesn’t put down at least 20% of the purchase price of the asset used as security for the mortgage loan.