What Is Mortgage Insurance?

If buying a home is your next financial goal, then you may have heard about mortgage insurance. Mortgage insurance is probably not what you expect it to be. We will cover what you need to know about mortgage insurance before you buy your future home.

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What is mortgage insurance?

Mortgage insurance is a way for lenders to protect themselves from high-risk borrowers. The mortgage payments allow lenders to compensate for any losses due to defaulting on a mortgage loan.

When you think of insurance of any kind, you typically think that the insurance would help you in times of need. Instead, this helps mortgage lenders to limit the risk from borrowers, which allows for more lending to happen.

The mortgage insurance payments protect the mortgage lender. It does not protect you in any way if you fall behind on your monthly payments.

Mortgage insurance makes the home buying process more expensive for the borrower. However, it will make it possible for some to buy a home at all. If your down payment is less than 20%, then receiving a loan with mortgage insurance attached may be the best (and only) way to secure a home loan.

How Mortgage Insurance Works

As the borrower, you would need to pay extra money to the lender as a form of insurance. The method of payment can vary by lender.

You may need to pay an upfront fee or a monthly insurance payment that is added to your mortgage payment. Some lenders may even require both an upfront fee and an additional monthly payment.

The payment amount will vary widely based on your own credit, loan amount, and ability to pay the mortgage. Typically, low-risk borrowers will be entitled to lower mortgage insurance costs. High-risk borrowers should expect to pay a higher mortgage insurance premium.

The borrow is basically paying for the privilege of borrowing the money even though the borrower has a high associated risk.

Why would I get mortgage insurance?

Borrowers are required to pay mortgage insurance if they make a down payment of less than 20% of the home purchase price. Many federal programs like the FHA and USDA loans also require mortgage insurance as a part of the loan conditions.

If you are purchasing a home through a loan, your lender may require that you purchase mortgage insurance. You may have no choice in the matter if your lender dictates that you must purchase mortgage insurance to receive the loan.

It is generally not helpful for your financial situation to sign up for mortgage insurance. If you have the option to skip mortgage insurance, then that may be a good choice, depending on your situation. Otherwise, you will be paying for your lender to be protected, but you will not gain anything in the process.

What are the common types loans that require mortgage insurance?

There are many different kinds of home loans. Each type of loan has a slightly different type of mortgage insurance associated with it for some high-risk borrowers. We will cover the most common kinds below.

Conventional Loans

Conventional loans are typically offered through private companies. Depending on your down payment amount and your credit score, the private lender may require private mortgage insurance (PMI) as a condition of the conventional loan.

The amount of private mortgage insurance will also vary based on the down payment, loan amount, and your credit history. Higher credit scores and down payments will generally lead to lower required mortgage insurance premiums.

With private mortgage insurance, the premiums are usually paid out monthly with no initial upfront fee. You may also have the ability to cancel your private mortgage insurance in certain situations.

Department of Veterans’ Affairs Loans

If you are a service member or a veteran, you have likely heard of the VA loan. The idea is to help these honorable men and women purchase homes.

The VA will back your loan, so there are no monthly mortgage insurance fees required. However, you may need to pay an upfront funding fee that will act as mortgage insurance. The initial funding fee will vary based on your military history, down payment, credit score, and several other factors.

Although the upfront funding fee is not termed as mortgage insurance, the idea is the same.

US Department of Agriculture Loans

USDA loans offer great mortgage rates meant to help low to moderate-income home buyers in rural areas. The hope is that these loans will help to infuse life back into rural areas.

The loans offer zero down payments to home buyers, but mortgage insurance is required. A USDA loan requires that you pay an upfront premium as well as monthly premiums.

Federal Housing Administration Loans

FHA loans are insured by the Federal Housing Administration but are completed through private lending companies.

FHA loans offer another low down payment option for people with lower credit scores. However, there is an enforced maximum loan limit that varies by county.

Every loan insured by the FHA requires mortgage insurance. You pay the annual mortgage insurance premium (MIP) monthly for the life of the FHA loan. The upfront and monthly mortgage insurance premium amounts vary by loan, but you can expect to pay it with FHA loans.

See also: FHA Loan Requirements for 2021

Can I avoid paying for mortgage insurance?

The easiest way to avoid mortgage insurance is by making a down payment of 20% or more. Of course, this is not feasible for every situation. Depending on your current financial picture, you may need to pay for mortgage insurance in order to purchase a home.

Alternatively, you can request to have your PMI canceled once the equity in your home reaches 20% of the purchase price or appraised value.

Bottom Line

Mortgage insurance is a required expense for many home buyers. If you are unable to make a 20% down payment on your home purchase, you will likely be required to pay for mortgage insurance.

Source: crediful.com

Joint and Survivorship Insurance: What You Need to Know

  • Life Insurance

A joint insurance policy is one taken by two people, offering benefits that aren’t provided by single policies and allow you to save a few bucks in monthly premiums. If you’re married and want your spouse to receive a benefit if you die and your children to receive one if you both die, it seems like the best choice.

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But that isn’t necessarily the case. Joint life insurance policies certainly serve a purpose, but there are some major flaws to consider as well.

What is Joint and Survivorship Insurance?

There are two types of joint life insurance policies: First-to-die and Second-to-die. In both cases, these options are generally cheaper than a single life insurance policy that offers the same benefit. As a result, they’re often taken by married couples who only have each other and their children to consider.

For instance, if you’re married with two young children and all your death benefit will be paid to your spouse and then, if they die, to your children, it can seem like the best option. You’ll be offered cheaper premiums, you’ll get your wish, and at the same time, you’ll be covered if anything happens to your partner.

Perfect, right? Well, not quite, as there are some problems to consider.

First-to-Die

A first-to-die policy pays money to one policyholder when the other dies. If you have a $500,000 policy charging $100 a month, then you and your spouse are responsible for paying the $100 and if one of you dies, the obligations will end and the $500,000 will be released to the surviving spouse.

Pros and Cons of First-to-Die Insurance

This insurance policy seems like a win-win on the surface. Insurance companies can save money by acquiring two customers at once and reducing liabilities slightly, while the policyholders can get the benefits provided by two policyholders.

But what happens if you break up? These policies are often acquired by married couples in their 30s and can last for several decades. At that point, they may have spent anywhere from 5 to 15 years together and are assuming they will spend the next 30 or so years together as well. But the average marriage lasts for just 8 years and no matter how connected you feel today, there’s just no way of knowing that your relationship will last.

If anything does happen, all those premiums could be for nothing. The policy will still exist and if you keep making the payments, you’ll keep the death benefit alive. But if you remarry, you’ll likely want the money to go to your new partner and not your ex.

This is the biggest issue with these policies and it’s why many insurance experts don’t recommend them for young couples. If you had two policies, you could just as easily make your spouse the beneficiary and if the relationship ends, you could remove them from the contract and add the name of your new partner.

What’s more, there’s no guarantee that this policy will be cheaper than two separate policies. First-to-die policies are actually quite rare, which means the market isn’t very strong. When competition is weak, prices are high, and in many cases, you may struggle to find a joint policy that is cheaper than separate ones.

Finally, let’s assume that the applicants are in their thirties and one of them dies when they reach 50. The surviving spouse then collects the money and can live comfortably thereafter. But what about their children? What about their new partner, assuming they find one? That policy will have finished, which means the surviving policyholder now needs to pay for additional insurance if they want to remain covered. That can be tricky for a 50-year-old widower, as premiums will have increased significantly.

Second-to-Die

A survivorship policy, also known as a “second-to-die” policy, is more common than the option outlined above. It is frequently acquired by married couples who want to provide cover for their children, and it pays out only when both of them die.

Pros and Cons of Need Second-to-Die Insurance

A second-to-die life insurance policy has its uses. It’s often recommended to individuals with large and valuable estates, as it can give heirs money to cover inheritance taxes and other costs and allow them to better prepare for the transition. 

However, if you’re an average married couple without sizeable assets, it likely won’t provide the benefits you need. Firstly, the surviving spouse won’t be provided with a death benefit and will be tasked with continuing to pay insurance premiums every month. If they have any financial issues, not only will they struggle to stay in the black, but they may be forced to stop making those monthly payments, thus rendering all previous payments redundant.

On the plus side, second-to-die life insurance is often cheaper than purchasing separate life insurance policies. It’s also much easier to acquire, as the insurance company is insuring two people and not one, which greatly reduces their risk and means they are less concerned about health questions and medical exams.

It can also improve the value of your estate, which is important if you’re giving this away to one or more heirs. Again, though, we have to stress that the benefits may not be enough for the average married couple and they should instead look into separate life insurance policies.

Which Policy is Right for You?

With all things considered, how do you know which policy is right for you?

Multiple options and several factors to consider, but it’s actually quite simple. Unless you have a large estate, you should look into getting separate life insurance policies for both you and your spouse. You can make each other the main beneficiaries and then add the names of your children just in case you both die at the same time.

If you have a large estate and your spouse will not be left financially destitute in the event of your demise, second-to-die life insurance should be considered. 

With all options, however, you can get quotes, compare the premiums, payouts, and benefits, and then see which one stands out the most. 

Look into term-life insurance, whole-life insurance, and accidental death insurance when considering an individual policy, as they all provide something a little different and both the costs and cover varies greatly.

Source: pocketyourdollars.com

What is Accidental Death Insurance, and do you Need it?

  • Life Insurance

Accidental death insurance, also known as accidental death and dismemberment insurance, is a type of limited life insurance often acquired for a nominal fee or added to an existing policy. As the name suggests, it releases a benefit if the policyholder dies from an accident or suffers a dismemberment. 

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Accidents kill an estimated 160,000 Americans a year and are far more common amongst men aged between 18 and 44. Many of these deaths occur as a result of falls and motor traffic accidents, both of which are covered by most accidental death insurance policies.

When You Don’t Need Accidental Death Insurance

If you already have life insurance, you can probably overlook accidental death insurance. In such cases, it will simply increase the value of the payout when you die, known as “double indemnity” coverage.

Unlike whole-life insurance policies, it does not provide policyholders with a separate investment vehicle that they can cash out at a later date. Generally, accidental death insurance doesn’t offer anything that a traditional life insurance policy can’t provide, and it may therefore be deemed an unnecessary expense.

However, there are exceptions.

When You Need Accidental Death Insurance

An accidental death benefit can’t provide you with anything that you won’t get from a traditional life insurance policy. However, it’s a different story with dismemberment insurance. This will cover you in the event that you lose a finger, toe or arm, which means you’ll have the money you need for medical costs and may be compensated for lost work.

Accidental death insurance can also help to cover any additional medical fees that result from necessary treatment taken after an accident and before death. Your family may be forced to cover these bills, and an additional death benefit can help them with that. 

Accidental death and dismemberment insurance is not something we would recommend in lieu of traditional life insurance, but if you have the option to add it to an existing policy for a few bucks a month, it’s well worth considering.

How Much Does Accidental Death Insurance Cost?

The price of your accidental death insurance premiums will depend on your payout as well as your risk factor. The average person can expect a charge of roughly $5 per month for every $50,000 of coverage, which means a benefit of $100,000 could cost as little as $10 a month.

But, as we have discussed many times before, underwriters focus on probabilities. The more likely you are to die from an accident, the higher those premiums will cost. For instance, if you’re an 18-year-old who has just started driving and enjoys a few high-risk hobbies, you may see those premiums climb.

How Long Does Accidental Death Insurance Last?

Accidental death insurance policies typically run for up to 40 years. You choose the desired term at the start and this is used to calculate your premiums, with longer terms leading to higher prices on account of the increased risk.

What is Not Covered by Accidental Death Insurance?

Accidental death insurance generally doesn’t cover all accidents and all dismemberments. The exact coverage will depend on the policy, and it’s possible to tailor your policy to include some of the things not traditionally included, but this may increase the premiums.

Suicide

Suicide is a tricky one. Many life insurance policies will payout if the policyholder commits suicide, but only if it occurs after the first two years and it is proved that they committed suicide so their loved ones would benefit (although this is not easy to prove).

However, accidental death insurance policies tend to rule suicide out altogether. Many deaths caused by misadventure may be queried as suicide, such as falls and drownings, but unless there is actual proof that they intended to take their life, the death will often be ruled as misadventure, in which case an accidental death insurance policy may payout.

War Injuries

Accidental death insurance rarely pays out for deaths resulting from war injuries. This is true whether the policyholder is shot or dies from an explosion or fall. That death was certainly not intentional, so you could argue that the policy should pay, but most insurers will refuse.

Illness and Disease

An accidental death insurance policy is not designed to payout in the event that you die from an illness or disease. Your beneficiaries may also face some resistance if you had a serious illness or disease at the time of your death but an accident was ultimately the thing that killed you.

For instance, if you have a serious mobility problem and this causes you to fall, hit your head, and die, then technically an accident killed you, but that accident wouldn’t have happened if not for the illness, creating some technicalities that will no doubt lead to problems when filing a claim.

Drugs or Alcohol

An accidental overdose is rarely covered by accidental death insurance. There will be no benefit for your loved ones if it leads to your demise, and no benefit for you if it leads to long-term health complications.

This is not true for all policies, however, and there may be exceptions for drugs that were prescribed.

How Can the Cause of Death be Proved?

As alluded to already, the cause of death isn’t straightforward. With a traditional life insurance policy, if the policyholder dies outside of the contestability period, the insurers will rarely get involved. That changes if they have suspicions about the death and believe that a crime was committed (fraud, murder) but it’s rare.

With accidental death insurance, however, there are many more nuances. As a result, an official investigation may be ordered, and this can include an autopsy.

How Does the Dismemberment Payout Work?

If the policyholder losses an appendage as a result of an accident, they may receive a partial benefit paid direct to them. The policy will dictate how much is paid and why, but generally the payout will be made following a non-excluded accident that results in the loss of:

  • An arm
  • A leg
  • A finger
  • A toe
  • Sight

Higher payouts may also be provided if the policyholder suffers complete paralysis.

Source: pocketyourdollars.com

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Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.