Friday, February 05, 2010

Mortgage Insurance: Old vs New

Back in the day, agents routinely sold "decreasing term life insurance" plans to help their clients' beneficiaries pay off a mortgage. The plan, written to coincide (generally) with the number of years on a given mortgage, had a fixed premium but a declining face amount. The idea was that, as the mortgage balance declined, so would the policy.

The most obvious problem with this approach was that the policy actually became more and more expensive with each passing year, as the same premium pruchased less and less protection. There were other problems with these plans, as well, but they remained a commonly used tool for a long while.

Today, we often use some kind of permanent plan (such as Universal Life) or "regular" term plan to cover mortgages. In fact, we often don't sell separate policies to cover a mortgage, but simply include it as part of a comprehensive package.

The problem with this approach is that it still only covers one risk: death. Of course, some people (but not nearly enough) own disability insurance, which can help pay the mortgage in the event that one becomes disabled. Another approach, which is currently being touted by Assurity Life, is to couple a Critical Illness benefit with a life insurance plan. In a video the carrier recently sent to its agents, Ken Smith (Director of Health Products) explained why this may be a good idea:

[ed: the video was distributed "for agent use only," so I can't embed or link to it here. I'll do my best to pass along Mr Smith's "pitch"]

Something like 25% of folks in the UK own a critical illness policy; of those, over 60% bought their plan as a means of covering their mortgage. After all, what's more likely to happen before one reaches age 65, death or a critical illness? Folks with life insurance protection only could face a very unpleasant surprise if they're diagnosed with cancer or have a stroke. Either of these would mean some major time off work, and an increased risk of losing the house while still very much alive.

According to Mr Smith, the cost of the additional protection is usually "less than the cost of a cup of coffee a day."

It was unclear to me whether Mr Smith was discussing a critical illness policy with a death benefit, or a life insurance policy with a critical illness benefit. I'm not aware of any life insurance plans already in force to which one could add a critical illness rider. Likewise, most CI plans don't have a death benefit. So, what's one to do?

Well, if one currently has neither, then a combination plan may be the best best. If one already owns the "old fashioned" kind of mortgage insurance (e.g. term life), then supplementing that with a separate CI plan may be the best bet. Either way, your first stop should be with a professional, independent agent who can help you sort out your options. It's one more way that insurance can help manage risk.
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