The Truth About Mortgage Protection Life Insurance

Summary: Mortgage Protection is just life insurance.  Life insurance is extremely important and most people don’t have enough of it.  Most people that purchased life insurance after responding to a direct mail solicitation for “Mortgage Protection” are paying way too much for their policy.  In many cases you can get a new policy and save 50% to 75% or more.

*Male Aged 40 Non-Tobacco $250,000 Death Benefit, 20 Year Level Term

*Female Aged 50 Non-Tobacco $250,000 Death Benefit, 20 Year Level Term

*Based on Compulife published rates Aug. 2017 for leading A+ rated carrier. Meant to be representative.  Not responsible for errors or changes.  Not an offer of life insurance. All applications subject to underwriting requirements of issuing carrier.

How Can I Save So Much Money?  Sounds Too Good To Be True (TGTBT)!

The short answer is the life insurance company knows more about your health which allows them to make a more informed decision about the risk you present and as a result make you a much more competitive offer.  Often this includes taking a medical exam including blood work (“an insurance exam”).  You get rewarded for your good (or even “average”) health.  Some carriers are able to offer these very competitive rates without an exam.

The longer answer starts with the life insurance product that is typically being presented as “Mortgage Protection.”  It uses what is called “Simplified Issue” underwriting.  There is only one rate class, “Standard,” meaning everyone that qualifies for the product pays the same (assuming same age, gender, nicotine use).  That “Standard” rate is higher than a regular “Standard” rate on a fully underwritten (e.g. the one with the medical exam) product.

What is “Mortgage Protection” Insurance?

What most consumers know today as “Mortgage Protection” is a brilliant marketing term coined a couple decades ago; but that’s all it really is, a marketing term.  The actual base product being promoted is nothing more than a level term life insurance policy with the suggestion of a death benefit equal to the person’s current mortgage balance.  The idea is that mortgages are new, large obligations that people did not have the last time they reviewed their life insurance needs. They are promoted with hundreds of millions of pieces of mail.  If you took out a mortgage or refinanced a home recently you’ve gotten stacks of mail, which are often very personalized using the name of the mortgage holder and the mortgage amount, which are easily attainable public records.  The personalization combined with the vast quantities of them (sent by unrelated, competing marketing companies; no different than any other product categories that send you mail) cause many people to start to assume it is a requirement that they must purchase it (they don’t).  At the end of the day, if you’re a healthy fifty-year-old woman, these direct mail pieces are the start of a conversation with a life insurance agent that will present you with a no medical exam “Simplified Issue” term life insurance policy at over four times the cost of a similar policy.

When Can Simplified Issue Mortgage Protection Make Sense?

They really are easy.  Complete an application with an agent.  Get an answer (& coverage in place) in a few days, maybe sooner.  No need to mess with a medical exam. At younger ages and smaller face amounts the absolute dollar amount of savings are smaller.  The convenience may be worth the higher rates.  There are also people that just don’t want to do a medical exam (bloodwork).  Finally, there are underwriting “sweet spots” where certain health conditions really are better off with simplified issue underwriting (the carrier wants a lot of people to qualify so people just inside the guidelines benefit from the one-size-fits-all pricing).  In these cases, an experienced life agent can advise you.

So How Much Life Insurance Do I Need?

This is a loaded question.  Everyone’s got a different answer and every situation is different.  Assuming you have someone else (child, spouse, etc.) counting on your income, one answer is as much as you’ll qualify for and can reasonably afford.  For most people, the answer is much more than you currently have and that’s even if you count the standard 2x salary your employer offers you as long as you keep that job.  If you’re in good health and younger you’d be surprised how much you can get for so little.  *A thirty-year-old in good health can get a $1,000,000 policy for less than what $250,000 of “Mortgage Protection” costs.

Assuming I Want to Save Money, What’s Next?

Speak with a good agent.  Usually you can handle the whole consultation and initial application process over the phone (no need for an agent to visit and interrupt dinner).  The agent should be able to give you some pricing expectations based upon the health information you share.  You schedule and complete your insurance exam (or phone interview) at a time convenient for you.  In most cases in a week or so after you complete your exam the insurance company is able to make you an offer and your policy comes out in the mail.  In some cases because of your health history the company may request medical records from your doctor.  The cost of the exam and any records gathering is borne by the insurance company whether you accept their offer or not.

If you purchased “Mortgage Protection” isn’t it at least worth a brief, no pressure, no obligation phone conversation with an agent to see how much you can save each month?

If the price was going to be half or less of what you were presented a year or so ago how would that have impacted how you viewed the value equation? If you considered “Mortgage Protection” but decided not to buy (or buy as much as you would have liked) and price was a factor isn’t it also worth a conversation?