Disability insurance should be a vital component in your financial plan, especially if you have children or other dependents counting on you for support. But this may be hard to do if you have preexisting medical conditions such as diabetes, cancer or musculoskeletal disorders.
Many disability insurance companies will exclude those and other conditions from coverage if you already have them when you apply, or else the coverage may be prohibitively expensive.
And the disturbing fact is, almost half of all foreclosures stem from medical or disability issues where there was no insurance protection. But mortgage disability insurance should not be confused with private mortgage insurance, which is designed to pay off the lender if you default on the loan.
The Mortgage Disability Insurance Alternative
If you cannot qualify for standard disability coverage, then you may still be able to get a limited amount of protection from mortgage insurance coverage. This type of insurance is similar to mortgage life insurance, which is designed to pay off the mortgage if you die.
Mortgage disability insurance will pay your monthly mortgage while you are still living if you become disabled. The chief advantage of mortgage disability insurance is that there are no underwriting requirements.
Mortgage disability insurance is often coupled with mortgage term life insurance so as to cover both premature death and disability. But this type of insurance is popular with homeowners in high-risk occupations, such as roofing or construction because of its generous underwriting guidelines.
A Very Real Problem
If you’re 20 years old today, then statistics show that you have about a one-in-four chance of becoming disabled at some point in your life. It is far more likely that you will become disabled than it is for you to die prematurely.
This is why mortgage disability insurance is so important. If you have family members or other loved ones living with you, then this type of insurance can protect all of you from eviction or foreclosure if you become unable to keep your job.
Pros and Cons of Disability Income
In addition to having more forgiving underwriting requirements, the monthly payments from a mortgage disability insurance policy are also tax-free, as long as you haven’t deducted the cost of the insurance premium paid on your tax return.
This means that you may not have to carry as much coverage as you initially thought you would. But mortgage protection insurance is still fairly expensive, so be prepared to shell out a few dollars for this protection if you elect to take it.
Furthermore, mortgage disability insurance provides a declining level of protection as you pay off your mortgage, even though your premiums won’t change. And many mortgage disability policies will only pay off the interest and principal on your home.
If you want to cover taxes, homeowner’s insurance and other homeowner’s fees, you will usually need to purchase additional riders to cover these items. Mortgage disability coverage is not designed to cover all of your monthly expenses, but only your mortgage payment. Utilities and credit cards cannot be paid from mpi policies.
Benefit and Elimination Periods
All disability insurance policies have two distinct periods. The benefit period is the length of time that the policy will make monthly premium payments to the insured if they become disabled. This can be for as little as three months or until the insured reaches retirement age. Of course, the longer the benefit period, the higher the cost, but this may be worth it if you suffer from a long-term disability.
The elimination period is the period of time that you have to wait before the disability policy begins paying out. This waiting period is generally anywhere from one month to two years. The longer the elimination period, the cheaper the policy premiums will be.
How Mortgage Disability Insurance Premiums are Calculated
There are four basic factors that will determine the amount of premiums that you will pay for your mortgage disability insurance provider. Your age, the mortgage amount, your health (within broad parameters) and your occupation.
If you work in a riskier occupation such as construction, then your premiums will be higher than if you work an office job. Premiums are generally paid once or twice a year or every month in some cases. If you become disabled, then the policy payments are made directly to your lender. They do not come to you first.
Mortgage Disability Insurance Riders
Most of the time, mortgage disability insurance plans are themselves sold as a rider on a mortgage term life policy. A disability rider will provide you with monthly income up to the limits specified in the policy if you become disabled. But many mortgage protection insurance policies often offer at least one of these riders:
- Return of Premium rider – This rider will allow you to collect the entire amount of premiums that you have paid for your disability coverage at the end of your policy’s term. Of course, this privilege comes at an additional cost.
- Involuntary Unemployment – If you get fired or laid off from your job, then this rider can cover some or all of your mortgage payments for a period of time specified in the policy. This is the only form of insurance that will pay you for job loss.
- Expenses Related to Your Mortgage rider – This type of rider can pay for additional mortgage-related expenses such as real estate taxes, homeowner’s insurance or homeowner’s association fees.
Where to Get Mortgage Disability Insurance
Your mortgage lender probably offers this form of protection for all of its customers, but you should shop around to find the best deal that fits your needs at an affordable price. But if you are relatively healthy, then you may want to look at a standalone or group long-term disability insurance policy or short-term disability insurance, as these may be cheaper than mortgage disability insurance.
Mortgage disability insurance can provide you with valuable insurance protection if you become disabled. Although it usually costs more than traditional group or standalone policies, it may be your only option if you have significant health issues or work in a high-risk occupation. Consult your financial advisor or life insurance agent for more information about mortgage disability insurance and whether it’s right for you. The coverage that you need on your home may be just a phone call away.