This question is one of the most asked questions by my clients, yet the most difficult to answer right away. It varies between company and program. Think about mortgage protection like buying a car. Do you want to have power and heated seats or not? Do you want a remote or manual start? Do you want it to be a flex fuel or a hybrid? There are many different types of mortgage protection and various additions that can be added, which depends on the client and what they want their plan to DO for them! It is important to first understand the question, “what is mortgage protection”. From there determine the multitude of carriers that provide it and what their core differences are. Finally, select the specific type of policy you would like. The answer to this question is, it depends on you and what you want.
What is Mortgage Protection?
All insurance is purchased for a purpose. From paying off a large debt if you were to pass away while paying it off or to pay for your funeral, you will have to know WHY you are purchasing the insurance. Mortgage protection is, in essence, a term life insurance policy that covers the length of the mortgage and will be used to pay off the mortgage in case of an untimely death. Traditionally, mortgage protection plans come with additional riders, which are additions to an insurance policy. These riders are called living benefit riders and are designed to pay the insured while they are still alive if specific conditions take place. The most common riders are critical illness rider, chronic illness rider, and terminal illness rider. Some companies forego using a critical illness rider for a confined care rider, or they have a critical event rider. The purpose of these riders is to get money to the insured in case the worst happens, such as a diagnosis with cancer that could potentially affect time off work and even pay. This allows the insured to receive funds from the policy, depending on the company a max of up to 70 -100%, to pay off the mortgage during a time of need.
What Companies Provide Mortgage Protection?
There are hundreds of insurance companies that claim they provide mortgage protection, but all they have is a basic, or traditional, term. That’s just a term policy without the additional living benefits. There are a handful of A-rated carriers that have mortgage protection terms with living benefits already rolled in, at no additional charge. Some of those are Americo, American Amicable, Columbian Financial Group, National Life Group, North American, Foresters and Mutual of Omaha. Each of these companies are priced slightly differently, so it’s important to understand the differences between each. For instance, Americo’s critical and terminal illness riders pay out up to 100%*, but Mutual of Omaha’s pays out up to 80%. American Amicable doesn’t have the critical illness rider come with it automatically, instead it has a confined care rider and the critical illness rider is an additional charge if its added. I could go on and on, but this is the reason why it is important to have an advisor that can walk you through everything. They can provide insight and understanding between all of the insurance carriers, so you truly find the policy that fits for you?
How Do Companies Determine the Cost?
All insurance carriers use what’s called a mortality matrix to determine their prices. Simply put, this determines the average age of death, for males and females, and calculates what their monthly premium should be in order for a profit to be made by the company. Life insurance is a gamble both for the insurance carrier and for the insured person. The insurance carrier is hoping that you will live and outlive the policy. The insured person is purchasing in case the worst happens. Therefore, the primary pricing mechanism for mortgage protection, same as any other life insurance, is the clients age, and how long their term is. This depends on how long their mortgage is, or when they plan to pay it off. Additionally, it is important to note that since mortgage protection policies come with additional riders that pay out upon sickness, disability and terminal illness, they are usually more expensive than a standard, or traditional, term life insurance. Traditional term plans pay out less than 2% of the time. With the additional living riders the percentage of policies that pay out go from less than 2% to approximately 20%. That’s a massive jump! Companies take this into account when pricing their plans.
The Tesla of Mortgage Protection Plans – Cash Back Plans!
Imagine having an insurance protection plan that not only covers you for sickness, disability, terminal illness, and death, but it also gives you back all of your money at the end of the policy if nothing happens to you. Welcome to the cash back option, also known as a return of premium plan. Mortgage protection plans can be used as a dual purpose plan, to not only cover the mortgage in case the worst happens, but also return your money at year 20 or 25 in a lump sum check if nothing happens so you can pay off your home 5 or 10 years early! Imagine, having a bill that is guaranteed to pay you back in some way. Most of my clients elect to do a cash back, because it just Makes Sense for their money! Getting their money back is a far superior option, instead of paying for a term that when it ends will lose the money spent.
How Do Insurance Carriers Make Money from Cash Back Plans?
Insurance companies invest all of your monthly payments in an indexed investment, basically it cannot lose money in the market even if it crashes. Year after year the interest compounds and grows to a level that is a financial benefit to the carrier. Note that every insurance policy does this, even non-cash back terms. At the end of the term, the company keeps the interest gained and returns your payments to you. If the insurance carrier is going to make money from your payments, regardless of the type of plan you get, why wouldn’t you elect to get your money back?
Are All Cash Back Plans the Same?
No, not even close. Each company that does provide a cash back election, not all companies do, differ in what ages they will approve, amount of years they will cover, how much money they return, and most companies will remove your critical and chronic illness riders when you get a cash back plan. I typically recommend Americo when it comes to cash back options, they really are the best on the market because they are the only company that provides 100% cash back and does not remove or alter any of the living benefit riders. Their plan also comes with an additional 50% accidental coverage added on top of the base coverage.
What are the Downsides of Cash Back Plans?
Cash back plans are more expensive than traditional terms. This is because the companies want to invest more money in the stock market indexed funds in order to increase the amount of returns that will compound over the period of your term. Some companies, like Mutual of Omaha, will remove your critical and chronic illness riders and also reduce your terminal illness rider to 50%. Additionally, the cash that accumulates is traditionally not accessible to the client until the last five years of the plan. Even then, its only a percentage of the overall cash within the policy that increases each year over the remaining five years. When doing a cash back plan, make sure this is a payment you can afford, know how much you want to get back and plan on keeping that coverage for the duration.
So, How Much Do Mortgage Protection Plans Cost?
As I mentioned above, it depends. It depends on the type of plan you want. It depends on how much you get and for how long. It depends on if you want a cash back or not. Ultimately, your best option is to discuss all of your options with an advisor so they can help you make the decision that’s best for you. In the meantime, you can click here and get a mortgage protection term life quote from a few of the top companies.
*All living benefit riders have a pay out “up to” percentage amount. However the total percentage that will pay out is determined on the severity of the illness. For instance being diagnosed with stage 4 liver cancer would be much more serious than a TIA stroke. The stroke may pay out 20% of your policy whereas the cancer would likely pay out max percentage, depending upon the company.