Should you buy mortgage protection insurance?

Mortgage protection insurance is a form of life insurance that pays your mortgage in case of death, disability or unemployment.

After you buy a home, you’ll start getting letters in the mail imploring you to purchase mortgage protection insurance.

After all, how will your family afford to keep living in the house if the primary breadwinner dies unexpectedly, becomes seriously disabled or gets laid off? You need a policy that will pay off your loan in case such a tragedy occurs.

Or do you?

Mortgage protection insurance is just a specialized life insurance product.

In the event you die, become disabled and can’t work, or lose your job, the policy will pay your loan.

Death will trigger a full and near-immediate payoff; unemployment or disability will provide a monthly benefit to keep your payments current. But it might have a waiting period before benefits begin as well as a limited number of months for which benefits will be paid.

Some policies cover all three of these events; others only cover one or two.

The policy’s cost is based on the amount of your home loan, your age, your health and sometimes your occupation. Underwriting standards are less stringent than those for regular life and disability insurance, so this product can make sense for people who are difficult to insure.

NAA Life’s product, for example, does not require a medical exam -- a common requirement for disability and life insurance policies.

This type of insurance pays your lender directly. Other life insurance policies pay your beneficiary (and disability policies pay you), which provides flexibility with how the proceeds can be used.

For example, if a breadwinner dies unexpectedly, paying off your home loan immediately is not necessarily the best strategy.

Holding on to the money and investing it at a higher rate of interest than the mortgage rate while continuing to pay the loan and get the tax deduction might be a better strategy.

Don’t confuse this product, which protects your family and is optional, with private mortgage insurance, which protects the lender and is mandatory on low-down-payment loans.

If you think this will serve you better than a traditional life or disability policy, make sure to examine a copy of the policy and understand its exclusions and limitations before you sign up.

Also, check the insurance company’s financial strength rating online at the A.M. Best website (www.ambest.com).

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