How do you think most people would answer the following question: “If you were to unexpectedly die, become seriously ill or get disabled, would you and/or your family suffer financially?”
Since most almost always answer, “Yes,” think about this next question: “Would that bother you? Especially if it meant that you and/or your family could no longer afford to stay in your home?”
Protecting Your Home versus Owning Life Insurance
In my experience, when financial professionals speak with someone who owns a home, particularly if they have recently purchased or refinanced, discussing the importance of “protecting their home” against unexpected events is usually a normal and acceptable conversation.
However, when financial professionals attempt to engage in a conversation with someone about the importance of owning life insurance, there tends to be a wall of resistance and skepticism that needs to be overcome.
So why is it that protecting your home is an easier conversation than owning life insurance? Perhaps younger home buyers are less likely to believe there is a chance they can die prematurely, or become sick or disabled. Perhaps older home buyers already own some life insurance and, therefore, don’t perceive the added need or value. Or perhaps most home buyers don’t even know that mortgage protection exists, nor do they know of a credible source to turn to.
Connection and Culture
As an expert in mortgage protection planning, I have found that two of the most common reasons why talking about “protecting your home” versus “owning life insurance” yield different results are:
1. When it comes to protecting their mortgage, most homeowners carry a unique and special connection to their home. This is largely due to the fact that they can physically, mentally and emotionally “touch and feel” their home. They experience the enjoyment of their family in their home on a daily basis. They see their surrounding community, friends, kids and schools, etc. Therefore, it is easy to understand why someone would have a heartfelt reason and desire to protect something they hold so near and dear.Life insurance, on the other hand, can be much more difficult to connect with. The reason why is because most people’s thoughts about life insurance tend to be something like, “Sure, if I die, life insurance leaves behind a large sum of money—but for whom and for who knows what?”
2. Although it is common in America for U.S. households to own life insurance and/or mortgage protection, this is not such a common tradition in many other countries. The fact of the matter is that many cultures do not traditionally own life insurance. So any form of family protection or insurance is rarely something they see, understand or believe they need.The good news is that regardless of someone’s nationality or culture, there is a much more universal understanding, connection and willingness to purchase a policy/plan that “protects their home and their family.”
What Is a Mortgage Protection Plan?
In its simplest definition, a mortgage protection plan is a life insurance policy equal to the amount of the mortgage. As you will see, there are also many other features and benefits. However, the primary purpose of mortgage protection is helping individuals and families ensure they can stay in their home and their children can stay in their schools in the event of an unexpected death, disability, critical illness and more.
Old Mortgage Protection
Up until the past decade or so, mortgage protection plans were offered solely through banks and had four major disadvantages:
1. The plans were decreasing term policies. What this meant was that as the mortgage amount decreased over time, your death benefit was reduced proportionately.
2. The monthly cost remained the same throughout the duration of the loan, even though your mortgage amount and death benefits were decreasing.
3. These plans paid a benefit in the event of a death only.
4. The beneficiary of these plans was solelythe bank, offering no liquidity or options for the spouse and/or heirs.
Today’s Mortgage Protection
Today’s mortgage protection plans have evolved, becoming much more family-friendly, flexible and, most importantly, offering many additional valuable features and benefits.
In fact, many of today’s mortgage protection plans offer living benefits, which actually help individuals and families stay in their homes when difficult situations arise while they are alive, such as a disability, illness and more.
When choosing today’s new and improved mortgage protection plans, homeowners now have the flexibility, option and decision to:
- Choose the number of years they wish to have this protection: 10, 15, 20 or 30 years—or even for their entire lifetime.
- Maintain the same level of protection for the entire duration of the policy, regardless of how much the mortgage amount decreases over time.
- Determine the kind of policy that best fits their situation: term, universal, whole life insurance or any of the many variations of these policies.
- Choose the policy owner (policy ownership can be transferred).
- Decide whose life will be insured (the insured can rarely be changed).
- Determine who makes the policy payments; there are no restrictions on who makes the payments.
- Choose the primary and secondary beneficiaries, which are most commonly your spouse, children, trust, bank/mortgage company or any combination thereof. Beneficiaries can be changed at any time for any reason.
- Reduce the amount of insurance (at any time for any reason).
- Cancel or terminate the policy (at any time for any reason).
- Receive a full or partial refund on any unused payments, and sometimes receive even more than your payments.
- Transport the policy to another home or mortgage; these policies are fully portable should you choose to sell, relocate or refinance.
Key Features and Benefits of Mortgage Protection
Since each family’s situation is unique, when it comes to designing a mortgage protection plan there is no “one-policy-fits-all.” The most common features and benefits of these protection plans for homeowners are as follows:
The main component of a mortgage protection plan is a life insurance policy. In the event of an unexpected and untimely death, these plans are designed to pay a lump sum of tax-free monies equal to the original mortgage amount, to the beneficiaries of choice. Since most policy owners choose their spouse and/or heirs as their beneficiaries, this offers them the options to pay off the mortgage in full or in part or to keep all of these monies to help make the mortgage payments (or to use in any other way they deem appropriate).
2. Disability – There are two ways mortgage protection plans can help make the mortgage payments, either in part or in full, in the event of an unexpected disability:
a. Purchasing a life insurance policy with a waiver of premium (WP) rider, which has several benefits: The first benefit of this rider is that it guarantees the insurance companies will continue to make the full payments for this policy—for the entire remaining duration of the policy—in the event of a disability. (Note: Most insurance companies only allow the WP rider to be added up to the age of 65.) A second benefit of the WP rider is that, in most cases, the rider guarantees the policy can be converted to a permanent/whole life policy in the event of a disability. Again, the payments are fully paid by the insurance company for the entire remaining duration of the policy. Since these policies accumulate cash value over time, the cash value monies can be withdrawn and used over time to help make the mortgage payments.
b. If someone does not have any disability insurance, whether through their employer or an individual policy, then a discussion should take place about reviewing the options of adding disability insurance. These disability policies can either be separate and individually owned policies, or they can be packaged together with a select number of life insurance policies.
3. Accelerated Benefits – In most states (but not all), life insurance policies have an accelerated benefit rider (ABR). The ABR rider is an option in a life insurance contract that allows for accelerated benefits or partial benefits to be accessed sooner than they would otherwise be payable.There are no additional costs for these ABR riders; however, the accelerated benefit payment will be less than the death benefit because it is paid prior to the death of the insured.ABR riders typically provide benefits for three different types of serious health conditions:
a. Terminal Illness – This type of ABR rider is activated when a qualified doctor certifies that the insured has less than two years to live. Depending on the policy and company, this benefit allows the eligible insured to access up to 90% of the policy face amount (which can be capped at a maximum dollar amount). These monies are paid directly to the insured and can be used for whatever reason they choose.
b. Critical Illness – This rider provides for the payment of an accelerated benefit if an eligible insured experiences terminal or covered critical illnesses, which may include heart attack, stroke, invasive cancer, end stage renal failure, major organ transplant, ALS, blindness, paralysis, arterial aneurysms, central nervous system tumors, major multi-system trauma, AIDS, severe disease of any organ, severe central nervous system disease, major burns or loss of limbs.
c. Long Term Care – This ABR rider is triggered in chronic conditions when an eligible insured is unable to perform two or more ”activities of daily living” (ADLs), which include: eating, bathing, dressing, toileting, transferring (walking) and continence. This type of ABR rider can also be triggered in the event that the eligible insured is cognitively impaired. This type of ABR rider is designed to allow the eligible insured to access a portion of the policy’s face amount to help pay for any costs associated with these long term care or cognitive-related illnesses.
Who Is a Good Fit for Mortgage Protection?
I have found that the three most common situations that can make an individual an excellent fit for a mortgage protection plan are:
1. Someone who has no insurance or backup plan whatsoever. In this case, having a mortgage protection plan is a great first step. These plans help keep families in their home and also provide access to much-needed monies during a time when they need it the most.
2. Someone who owns a reverse mortgage—or is considering one. One of the most common concerns most seniors have about doing a reverse mortgage is the fear of “disinheriting their family.” Since mortgage protection plans are specifically designed to protect and pay off a mortgage, they provide a solution by eliminating or minimizing this fear and concern.
3. Someone who has some form of existing life insurance. Most families who currently own life insurance either have it solely through their group/employer coverage (which is usually a very limited amount), or they own separate life insurance policies. In either case, this life insurance is usually designed to replace their income should an unexpected death occur.
However, most U.S. households do not own enough life insurance, especially if you factor in paying off the mortgage or continuing to make the mortgage payments. Consider these facts from a LIMRA study of U.S. households in 2010:
- 33% have zero insurance
- 50% said they know they need more insurance
- 56% said they would have immediate trouble meeting living expenses should they lose their primary breadwinner’s income
- 63% of home foreclosures are due to a disability
So in situations where some life insurance currently exists, mortgage protection plans can be an excellent addition or supplement. Their current life insurance ensures some income replacement, and a mortgage protection plan creates additional and important home security.
A Step in a Better Direction
In summary, mortgage protection planning is an excellent opportunity to open a door for discussion about better protecting the individuals and families we serve against situations that can cause financial ruin. My sincere hope is that this article helps and encourages all financial professionals to add—or enhance—their practice by helping families build a bigger and stronger fence around their wealth.
As I have repeatedly said over the past 20 years, I firmly believe 90% of our job is helping our clients and their families avoid large losses. These large losses not only apply to a family’s investment portfolio, but also apply to life’s unexpected events—which can and do happen.