The Basics of Mortgage Insurance Tips

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Should I get a group policy through my employer?

Group Mortgage Insurance Coverage versus Individual

You may work for an employer that offers group Mortgage Insurance Coverage with an inexpensive premium, no medical underwriting, and a very convenient application process. If so, you might think that this leaves you off the hook for getting your own, fully underwritten, individual Mortgage Insurance Coverage outside of your place of employment. Unfortunately, having all your insurance through a group plan with your employer actually puts you and your family's future at risk.

Many group insurance policies are not portable. That means that you may be insured for the few years that you work for the company, but your coverage ceases the moment you stop working for them. Whether you quit in order to work for yourself, for another company, or to be a stay-at-home parent, you will no longer have Mortgage Insurance Coverage. You will now have to apply for a fully underwritten policy at your increased age. If you‘ve had any medical problems, weight gain, or prescriptions added to your regimen, then you'll face more expensive Mortgage Insurance Coverage than you would have if you had applied for your own individual policy from the start.

Should I get a Mortgage Insurance Plan through my lending institution?

Individual Mortgage Insurance Plan vs. Lending Institution Plan

When you initially obtain your mortgage through your bank or lending institution, you may be offered the opportunity to buy a Mortgage Insurance Plan directly through them. They may even offer you a rate that seems hard to beat, but it's important that you really understand all the pitfalls before you commit to the policy.

  • Lack of flexibility: When you buy your Mortgage Insurance Plan through your lender, you can only buy a death benefit that covers your mortgage. You cannot add additional death benefit amounts to cover college tuition or other costs. You also cannot name your own beneficiary, since the purpose of the insurance is only to pay off your mortgage in the event of your death. This means that only your lender can be a beneficiary.
  • Underwriting: It's possible that if another company buys your lending institution out, your policy will no longer be any good, since you would have been paying premiums to the other company. If this is the case, then you'll need to get a new policy and undergo new underwriting, which could result in higher premiums or a decline if you're in poor health.

Should I even bother with insurance when I am young and healthy?

The Power of Youth in Insurance

One of the easiest ways to control your Mortgage Insurance Costs is to buy your policy when you're young. Mortgage Insurance Costs do nothing but increase as you age; add to that any health problems you may accumulate over the years and you could be facing a very steep mortgage insurance premium.

Often, people who are young don't buy mortgage insurance because the thought of death seems so far off and unlikely. Of course, it is important to remember that death can happen at any age through accident or illness, and like a drowning man cannot buy a life vest, a person who is dying can no longer buy a mortgage life insurance policy. But beyond the thought of death is the consideration that the easiest way to control Mortgage Insurance Costs and create long-term cost savings is to buy a mortgage life insurance policy while you're young and the policies are inexpensive.

Do I have to get a policy that is medically underwritten?

Medical and Non-Medical Underwriting

Many Mortgage Insurance Companies offer two different types of mortgage insurance policies—the type that require medical underwriting and the type that do not.

  • Medical underwriting: A policy offered by Mortgage Insurance Companies that requires medical underwriting is one that will take all your medical information for that past 5 years and determine your risk to the insurance company based on your medical history. For individuals in perfect health, the Mortgage Insurance Companies that offer this type of policy often have the most affordable policies.
  • Non-medical underwriting: Mortgage Insurance Companies that offer policies with no medical underwriting ask no questions about your health. They base their rates solely on your height, weight, age, gender, date of birth, and smoking class. Of course, since people who apply for a non-medically underwritten policy are more likely to be an adverse risk to the insurer, the rates for these policies may be more expensive. They also may not guarantee a death benefit payout unless the policy has been in-force for two or more years.

How can insurance companies pay out these large death benefits?

The Law of Large Numbers and Mortgage Insurance Policies

It's natural to wonder how insurance companies can pay the death benefits on all the Mortgage Insurance Policies out there. When you consider how low the premiums are for such large death benefits, it seems unlikely that an insurer would actually be able to fulfill their obligation to pay your death benefit.

Mortgage Insurance Policies are priced based on the Law of Large Numbers. The Law of Large Numbers is a method of predicting an outcome based on statistical averages of similar groups. Mortgage Insurance Policies are priced in such a way that the premiums, when pooled, create more than enough available funds to actually pay out what will be needed for actual death benefit claims based on the statistical findings of the Law of Large Numbers. The insurance companies then put into reserves that amount of pooled premiums that will actually be needed (and that regulators require of them) so that they'll have enough funds to fulfill their obligations to policyholders.

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Jerry Mayo