Mortgage Protection Insurance

Mortgage protection insurance is life insurance bought to retire a home loan if the borrower dies. The phrase does not name a single product. NAIC's consumer material on credit insurance sets out what it calls the "four main types of credit insurance", which are credit life, credit disability, credit involuntary unemployment and credit property insurance, and mortgage protection insurance is not among them. What arrives under the name is one of two quite different arrangements.

In the first, the coverage is written in connection with the loan itself, the lender is the beneficiary, and the benefit is tied to the outstanding balance. In the second, it is an ordinary, separately underwritten term life policy sized to the mortgage and sold by direct mail after closing, with a beneficiary the borrower names. The contracts can look similar on a quote sheet and behave completely differently at a claim, so the useful first question is never what the policy costs. It is who receives the money.

The beneficiary question decides what the survivors can actually do. Where the lender is the beneficiary, the insurer pays the balance and the loan disappears. The survivors own the house free of the mortgage and receive nothing in cash. Where a person is the beneficiary, the same amount arrives as money the survivors control, and they may retire the loan, keep the cash and continue the payments, or split the difference. The second arrangement can always reproduce the first, because paying off the mortgage remains available. The first can never reproduce the second. That asymmetry, and not the price, is the substance of the choice between them.

The regulatory position is asymmetric too, and it is the non-obvious fact on this page. Regulation Z's finance-charge rules reach credit insurance written in connection with any consumer credit transaction, mortgages included, so the conditions at 12 CFR 1026.4(d)(1) apply: the insurance must not be required by the creditor and that fact must be disclosed in writing, the initial premium must be disclosed in writing, and the consumer must sign or initial an affirmative written request after receiving those disclosures. State consumer-credit-insurance law is where the difference opens. NAIC's Consumer Credit Insurance Model Act applies to consumer credit insurance sold in connection with personal, family or household credit, but excludes "[i]nsurance written in connection with a credit transaction that is: (i) Secured by a first mortgage or deed of trust; and (ii) Made to finance the purchase of real property or the construction of a dwelling thereon, or to refinance a prior credit transaction made for such a purpose." So the amount cap, the 30-day cancel-and-refund right and the choice-of-insurer provision that attach to credit life insurance on a car loan do not attach here, in a state that has adopted the model as written. Note the two limbs are joined by "and": a second mortgage or a home equity line is not excluded, and credit insurance on one of those stays inside the Act.

The channel explains the timing of the mail, and the timing is what makes it convincing. A mortgage or deed of trust is recorded in the county land records, and recording is what makes the interest known to the world rather than only to the parties. Those records are public, so a borrower's name, property address, lender and loan amount are available shortly after closing. A solicitation that arrives within weeks, addresses the borrower by name and quotes the loan amount is not evidence of any relationship with the lender. It is evidence that the writer read a public record. The practical test is the same one that applies to any unsolicited financial mail: a document that does not say who issued it, what the coverage costs, what it pays and to whom, is not a quote.

How to make the comparison the mail does not invite. Three questions put any of these offers next to an ordinary term life quote. First, what is the face amount, and does it stay level or fall on a schedule? A benefit that declines on a schedule written at issue is a different product from a level one, and the way it diverges from an actual amortizing balance belongs to the decreasing term life insurance page. Second, who is named as beneficiary? Third, is the policy separately underwritten, and if it is not, what is the waiting period before the full benefit is payable? A policy issued without health questions almost always carries one. With those three answers, the offer is comparable to a level term policy for the same face amount and term, and the comparison can be made in dollars per month.

It is not the mortgage insurance a lender actually requires. Private mortgage insurance protects the lender against the borrower defaulting, is commonly required on a low-down-payment conventional loan, and is covered on its own page. Mortgage protection insurance pays when the borrower dies. Sharing the word "mortgage" is all the two have in common, and a borrower already paying PMI who receives a mortgage protection solicitation is being offered a second, unrelated product rather than a replacement for the first.

The lender-beneficiary version is arranged at or near closing, alongside the loan, with the premium disclosed under Regulation Z and the borrower's separate written request on file. Its benefit is tied to the balance, so it declines as the loan amortizes and ends when the loan does. The direct-mail version is an ordinary term life policy: the borrower applies, is underwritten to whatever degree the insurer requires, names a beneficiary, and holds a contract that is independent of the loan and survives a refinance or a sale.

A hypothetical, to show what the beneficiary line is worth. Suppose the outstanding balance is $340,000 and the principal and interest payment is $1,780 a month. Under a lender-beneficiary policy, the insurer pays the lender $340,000, the mortgage is gone, and the survivor receives no cash. Under a policy of the same face amount naming the surviving spouse, $340,000 arrives as money. That survivor can pay the lender $340,000 and end in exactly the position the first policy produced, so nothing is lost by having the choice. Or the survivor can hold the cash and keep paying: at $1,780 a month, $340,000 covers 191 monthly payments, which is a little under sixteen years, before any interest the cash itself earns. The figures are invented for the arithmetic. The point is that the second arrangement contains the first as one of its options and the first contains nothing.

The follow-through is to size coverage against the household rather than against the loan. A mortgage is one obligation among several, and the ones that do not amortize, childcare, education, the years of lost income, are usually larger and are not shaped like a loan balance. A policy written to the mortgage answers the mortgage.

Pros

• It answers a real risk. A household that loses an earner and still owes a mortgage is exposed, and coverage sized to that exposure is a reasonable response.
• Some versions are issued with little or no underwriting, which can be the practical route for a borrower whose health makes individually underwritten coverage expensive or unavailable.
• Coverage arranged at closing takes effect at the moment the obligation is created, so there is no interval during which the debt exists uncovered.
• Where the policy is an ordinary term contract with a named personal beneficiary, it is portable: it survives a refinance, a move or the sale of the house.

Cons

• Where the lender is the beneficiary, the survivors receive no money and no choice about how to use it, even though the amount is identical.
• The consumer-credit-insurance protections that attach to credit life insurance on other loans do not attach to a first-mortgage purchase or refinance under NAIC's model act, so the amount cap, the 30-day cancellation right and the choice-of-insurer provision are not automatically available.
• The name covers two very different arrangements, so a price alone tells a shopper almost nothing.
• A benefit that falls on a schedule set at issue does not track the actual balance of the loan, and the gap opens early rather than late.
• Coverage issued without health questions usually carries a waiting period before the full benefit is payable, which is easy to miss in a mailing.
• A policy sized to one debt leaves the household's larger and less loan-shaped needs unaddressed.