Mortgage life insurance

Mortgage life insurance

Mortgage Life Insurance is a form of insurance specifically designed to protect a repayment mortgage. If the policyholder were to die while the mortgage life insurance was in force, the policy would pay out a capital sum that will be just sufficient to repay the outstanding mortgage.

Mortgage life insurance is supposed to protect the borrower's ability to repay the mortgage for the lifetime of the mortgage. This is in contrast to Private mortgage insurance, which is meant to protect the lender against the risk of default on the part of the borrower.

Contents

The Mechanics

When the insurance commences, the value of the insurance cover must equal the capital outstanding on the repayment mortgage and the policy’s termination date must be the same as the date scheduled for the final payment on the repayment mortgage. The insurance company then calculates the annual rate at which the insurance cover should decrease in order to mirror the value of the capital outstanding on the repayment mortgage. Even if the client is behind on repayments, the insurance will normally adhere to its original schedule and will not keep up with the outstanding debt.

Some mortgage life insurance policies will also pay out if the policyholder is diagnosed with a terminal illness from which the policyholder is expected to die within 12 months of diagnosis. Insurance companies sometimes add other features into their mortgage life insurance policies to reflect conditions in their country’s domestic insurance market and their domestic tax regulations.

The Controversy

Based on the mechanics of the product, mortgage life insurance is a financial product which paradoxically declines in value as the client-borrower pays more premium to the insurer.[1] In many cases, traditional life insurance (whether term or permanent) can offer a better level of protection for considerably smaller premiums.

The biggest advantage of traditional life insurance over mortgage life insurance is that the former maintains its face value throughout the lifetime of the policy, whereas the latter promises to pay out an amount equal to the client's outstanding mortgage debt at any point in time, which is inherently a decreasing sum.[1] Hence, mortgage life insurance is extremely profitable for lenders and/or insurers and equally as disadvantageous to borrowers.

In addition, lending banks often incentivise borrowers to purchase mortgage life insurance in addition to their new mortgage by means that are on the verge of tied selling practices. Tied selling of a product of self or of an affiliated party, however, is illegal in most jurisdictions. In Canada, for example, this practice is explicitly forbidden by Section 459.1 of the Bank Act (1991).[2]

Finally, mortgage life insurance is not required by law.[1] It is up to the client-borrower whether he or she will opt to protect his or her property investment by an insurance product or not. Similarly, the choice of insurer is completely unrestrained as well.

Because of these suboptimal qualities of mortgage life insurance, the product has been subject to sharp criticism by financial experts and by the media across North America for over a decade.[3][4] This has arguably led to fewer banks actively advertising this product in the recent years, although many still keep it in their portfolios. However, many critics fail to consider that in many cases where term life insurance is denied for health reasons, mortgage life insurance is still available. As such, mortgage life insurance can cover the biggest expense left by a deceased breadwinner - ie housing costs. Thus, it is simplistic to dismiss it out of hand as disadvantageous to borrowers.

Private Mortgage Insurance

The term Mortgage insurance may in some contexts refer to Private mortgage insurance (PMI), also known as Lenders mortgage insurance.[4] Private mortgage insurance protects the lender instead of the borrower, although its premiums are payable by the borrower. This type of insurance is compulsory in certain jurisdictions for mortgages started with low down payments.

In the United States, subject to Homeowners Protection Act of 1998,[5] a borrower who provides less than 20% down payment up front may be required to pay for private mortgage insurance until he or she has paid up at least 80% of the mortgage’s outstanding value.[4][5]

References

  1. ^ a b c What is Mortgage Life Insurance? from LSM Insurance, retrieved on June 10, 2011.
  2. ^ Section 459.1 of the Bank Act from the Department of Justice (Canada), retrieved on June 10, 2011.
  3. ^ Mortgage insurance: Not always a sure thing from CBS Canada, retrieved on June 10, 2011.
  4. ^ a b c Does mortgage insurance make sense? from CNNMoney.com, retrieved on June 10, 2011.
  5. ^ a b Private Mortgage Insurance from Federal Reserve Bank of San Francisco, retrieved on June 10, 2011.

See also

External links


Wikimedia Foundation. 2010.

Игры ⚽ Поможем решить контрольную работу

Look at other dictionaries:

  • Mortgage Life Insurance — An insurance policy designed specifically to repay mortgage debt in the event of the death of the borrower. These policies differ from traditional life insurance policies in that, for a traditional policy, the death benefit is paid out when the… …   Investment dictionary

  • mortgage life insurance — A life insurance policy that pays off the remaining balance of the insured person s mortgage at death. Bloomberg Financial Dictionary …   Financial and business terms

  • Life insurance — The foundation of life insurance is the recognition of the value of a human life and the possibility of indemnification for the loss of that value. F. C. Oviatt, Economic place of insurance and its relation to society[1] Life insurance is a… …   Wikipedia

  • Life Insurance — A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured. The goal of life insurance is to… …   Investment dictionary

  • mortgage redemption insurance — noun : insurance upon the life of a mortgagor providing for payment of any unpaid balance of the mortgage loan at the insured s death …   Useful english dictionary

  • Whole life insurance — Whole Life Insurance, or Whole of Life Assurance (in the Commonwealth), is a life insurance policy that remains in force for the insured s whole life and requires (in most cases) premiums to be paid every year into the policy. Contents 1 History… …   Wikipedia

  • Term life insurance — or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client… …   Wikipedia

  • Massachusetts Mutual Life Insurance Company — MassMutual Type Mutual company Industry Financial Services Founded Springfield, Massachusetts, USA (1851) Headquarters …   Wikipedia

  • Stranger Originated Life Insurance — (STOLI) is a life insurance arrangement, in which speculators, who have no relationship to a person, initiate a insurance policy against their life and fund the premium payments for investment purposes. [cite web… …   Wikipedia

  • Mortgage insurance — For information on insurance guaranteeing payment of the mortgage in the event of death or disability, see mortgage life insurance. Mortgage insurance (also known as mortgage guaranty) is an insurance policy which compensates lenders or investors …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”