Mortgage Disability Insurance 101: Your Questions Answered
Disability and illness are the leading causes of home foreclosures. Medical ailments or personal injury can take you out of work for an extended period of time. Being out of work might mean no wages, which is why you should establish a financial safety net to protect your family and your home.
The current pandemic also serves as a reminder that you should have adequate protection in place in case you suddenly become unable to work for an extended period of time. If you’re moving during these unprecedented times, you’ll want to make sure you’re prepared if you get sick or unexpectedly lose your ability to meet your mortgage payments.
Your home is probably your largest asset, which is why it’s important to have safeguards in place to ensure that you don’t lose your home due to medical issues or disability. Read on to learn more about mortgage disability insurance and how it might benefit you.
What’s Mortgage Disability Insurance?
Mortgage disability insurance (MDI), also referred to as mortgage payment protection insurance (MPPI), ensures at least a portion, if not all, of your mortgage, is covered should you become ill or injured and unable to perform your job. If you pass away prematurely with a mortgage balance, this type of insurance can also cover the remainder of your loan balance so your family doesn’t have to worry about meeting those payments or losing their home.
With MDI, your mortgage payments will be covered, either in part or in full, after an elimination period (typically 30-60 days after your disability diagnosis). Depending on your policy, this coverage will continue for anywhere between 1-3 years and will grant you enough time to recover or find another way to meet your monthly payments.
Unlike traditional life and disability insurances, which help families afford various living expenses after the death or disablement of a family member, this type of insurance is only designed to cover your mortgage should you become disabled. The money goes directly to your lender, which means you may need to find temporary relief for other debts, such as auto payments, student loans, and credit card accounts.
What Are The Pros And Cons Of Mortgage Disability Insurance?
If you’re older, work a hazardous job or have a preexisting medical condition, it may be harder to get approved for life or traditional disability insurance. With MDI, there’s almost guaranteed approval, even if you’re in poor health or work in a dangerous profession. Though your premium may be higher under these conditions, you have a better chance of being approved regardless of your medical history or occupation.
Having MDI as a safety net can also help put your mind at ease. As an estimated one in four 20 year olds will become disabled before retirement, many young and healthy homeowners invest in some type of disability insurance to plan for potential roadblocks. Even if you become disabled, you can have peace of mind in knowing your insurance company will send the exact mortgage balance to the lender so you won’t have to handle this money while you physically and financially recover. You’ll also have the comfort in knowing that you won’t lose your home, even if you’re unable to work due to disability.
One downside of MDI is its lack of flexibility. While other types of insurance supplement a portion of your income and allow you to choose how you spend your money, MDI can only be used toward your mortgage. In addition, MDI often carries a higher price tag than term life insurance, and some policies have fluctuating rates. Coverage also declines over time, meaning you’ll likely pay a consistent premium month after month even though the payout declines.
Does MDI Differ From Private Mortgage Insurance?
If you own less than 20% equity in your property, you’re required to pay private mortgage insurance (PMI). Many homeowners are wrong to assume that PMI would cover your mortgage payments if you were to pass away before your loan balance reached zero. While mortgage disability insurance protects you as the borrower, PMI is designed solely to protect the lender if you were to default on your loan. It would not assist your family if you fell ill or passed away, so if you’re unable to meet your payments and only have PMI, your home will likely go into foreclosure.
Unlike PMI, MDI isn’t required for homeowners. However, even if you are paying PMI, you may still want to invest in mortgage disability insurance as an added layer of protection for you and your family.
What Alternatives Could You Consider?
If you don’t have health issues, or you determine that you’re not at a high risk of injury or illness, there may be more affordable and suitable options for you. For instance, short- or long-term disability insurance may be enough for someone who works a low-risk office job or is young and in good health. Conversely, MDI may be necessary for someone who’s in poor health, works a high-risk job or whose ability to meet their monthly mortgage payments depends on their ability to work.
Taking out a home equity loan or opening a home equity line of credit may be another viable option for short-term financial relief if you become ill or injured and are unable to meet your mortgage payments. This type of loan may grant you more flexibility as you have the freedom to choose how you’d like to allocate the money. For instance, you can use these funds to cover medical expenses or to pay off outstanding debt while you recover.
If you’re physically unable to work, you could also use term disability insurance or an equity loan to pay for home accessibility upgrades. Whether you need to widen doorways, install slip-proof tiling or build a temporary ramp, these alternatives provide you with the means to accommodate your home for recovery.
Should You Buy Mortgage Disability Insurance?
If you recently bought a new home, you’ll want to consider what types of coverage you’ll need. Evaluate your current lifestyle and take into consideration any preexisting health conditions before determining whether MDI coverage makes sense for you. It makes the most sense to purchase mortgage disability insurance if you have existing medical concerns or if you work a high-risk job like welding. However, if you’re generally healthy and work a low-risk job, you probably don’t need an MDI policy right away.
If you have limited savings left after paying your down payment, you may be worried about how you’ll be able to keep your house if you unexpectedly fall ill. Especially if you have family members who depend on you for housing, this type of coverage may protect you from eviction or foreclosure if you become disabled.
Keep in mind that many lenders have a mandatory waiting period, which means you’ll still be responsible for 1-3 months’ worth of mortgage payments before your benefits kick in. Knowing this, you should still plan to have savings on-hand in case you experience a sudden loss of income due to illness or disability.
How Much Does Mortgage Disability Insurance Cost?
Your insurance premium will depend on several factors, including your age, occupation, the amount of current mortgage payments you have, and when you apply. It’s usually paired with traditional life insurance or bundled with other coverage, which can help lower your rate, though it may be purchased as a stand-alone policy as well. Based on your policy, you can expect to pay premiums on an annual, semi-annual, or quarterly basis.
Some insurers overcharge for specific coverages. The best way to ensure an affordable rate is by weighing all of your options. When shopping for a policy, consider the benefit and elimination period of each insurance company. In general, policy premiums will be cheaper when there’s a longer elimination period. Depending on your specific situation, you can use these factors to ensure you select a policy that fits both your budget and needs.
Who Offers Mortgage Disability Insurance?
Most mortgage lenders offer this type of insurance directly to its customers, but that doesn’t necessarily mean you should jump on the first offer you receive. If your mortgage lender doesn’t offer an MDI policy, you should ask your real estate agent for referrals that they trust in their network. You can also purchase a policy through a private insurance company or life insurance provider.
You should bear in mind that lenders often have a limited window after you secure a loan for when you can apply (usually within 2 years of closing on your home). If you miss this window, you may have a harder time finding an MDI policy, or you might need to look into alternatives like a term life insurance policy instead.
Should You Add Additional Riders To Your Policy?
MDI plans themselves are often sold as riders on a term life mortgage insurance policy. This type of coverage can supplement whole life insurance policies and can be coupled with other policy riders for more comprehensive coverage. While MDI covers your monthly mortgage payments, it may make sense to tack on additional riders for homeowners association fees, real estate taxes, homeowners insurance and other mortgage-related expenses as well.
Some insurers even offer a return of premium option. If you choose to opt for this type of insurance rider, you’ll receive a refund for any paid premiums if you don’t end up using the policy during your term. While adding these features can raise your premium, these customizations may be well worth the investment.
Mortgage disability insurance can provide peace of mind and valuable coverage should you become disabled or pass away. However, whether or not it’s necessary will depend on your unique needs. Before settling on a policy, be sure to consult a financial advisor or insurance agent to determine the best coverage for your needs.