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When does it make sense to buy mortgage disability insurance?

Getting insurance to pay off your mortgage in case of disability is smart, but which type of coverage is best? Here's what homeowners need to know about protecting their income.

When a person is unable to work for an extended period, one of the most difficult challenges is keeping up with monthly mortgage payments. A mortgage, after all, is the largest expense in most household budgets.

It’s not surprising then that medical issues are a leading cause of home foreclosures.

Since one in four workers will become disabled at some point in their working lives, disability insurance is highly recommended — particularly long term disability insurance. But a lesser-known option is mortgage disability insurance. In this article, we cover everything you need to know about mortgage disability insurance, including:

Read on to learn more.

What is mortgage disability insurance?

Mortgage disability insurance is similar to regular long term disability insurance in that it provides a benefit in the event you can’t work due to injury or illness.

The difference is that the benefit provided by mortgage disability insurance only covers your mortgage payments. It does not pay a percentage of your pre-disability income.

Therefore, it will not help you cover other expenses such as food, car payments, student loans, or credit card bills. In fact, payment from a mortgage disability insurance policy is typically sent directly to the lender on your mortgage.

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How does mortgage disability insurance work?

You can purchase mortgage disability insurance as a standalone policy. Another option is to get a combined mortgage life and disability insurance policy. This is a policy in which the life insurance component provides term coverage that will completely pay off your mortgage balance if you pass away. The disability component can cover your mortgage payments during a period of injury or illness.

Mortgage lenders often offer this protection to borrowers. It’s also available through licensed insurance agents, insurance companies, and other third-party providers.

If there are co-borrowers on a home loan, mortgage disability policies typically cover both individuals.

If you get mortgage disability insurance as a standalone policy, you may have the option of adding several riders. These include:

  • Related Mortgage Expenses. This is an added benefit that covers additional housing expenses, such as homeowners insurance, homeowners association fees, and property taxes.
  • Unemployment Waiver of Premium. This rider waives premium payments up to a certain amount if you are involuntarily unemployed.
  • Return of Premium. This rider will reimburse the premiums you’ve paid into the policy once the term expires. This rider typically adds 30 percent to the cost of your policy.

As with regular disability insurance, there is an elimination period, or waiting period, on this type of coverage. This is the amount of time from when you become disabled until benefits begin. This can be 30 or 60 days.

There is also a maximum benefit period on mortgage disability insurance. This is how long you can collect benefits, even if you remain disabled for longer.

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Mortgage disability insurance cost

Another similarity between mortgage disability insurance and regular long term disability is how your premium cost is determined. Both types will consider your age, occupation, and overall health to assess your risk of suffering an injury or illness that limits your ability to work.

The difference is that instead of considering your income, mortgage disability insurance premiums are based on your mortgage payment.

Is mortgage disability insurance worth it?

Because the policy benefit is lower, underwriting requirements for mortgage disability insurance are much lower than for traditional coverage. In fact, many policies don’t require a medical exam.

Therefore, mortgage disability insurance may be an option for homeowners who can’t qualify for regular long term disability insurance. That way, at least part of your budget will be covered by disability insurance benefits. And it can supplement a group disability policy in the event a person can’t medically qualify for regular long term disability insurance.

But individual long-term disability insurance is the better option if you can get it for the following reasons:

  • It is designed to replace your income in the event of a disability, which means the benefit should cover your mortgage in addition to your other expenses.
  • Mortgage disability insurance will not cover all mortgage-related expenses without an optional rider that will add to your cost. Base coverage only covers your principal and interest payment, not your homeowners' insurance or property taxes.
  • Mortgage disability insurance also does not cover payments on home equity loans.
  • Mortgage disability insurance benefits generally decrease over time as your mortgage balance decreases. However, your premium cost will remain the same.

If you feel you need more than what your current disability insurance coverage provides, you’re likely better off with a supplemental disability policy. The benefit of a supplemental policy can be used for whatever is needed, not just your mortgage.

Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

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