Disability Insurance: A policy specific to your mortgage is likely not your best option

Disability insurance should be a part of every family’s budget; however, you may want to consider choosing your insurance company yourself, rather than letting the bank choose one for you. request a no-obligation quote »

You could reduce your mortgage payments by several years and possibly hundreds of dollars just by avoiding some of the add-ons which increase your payment and put dollars of pure profit into the figurative “pocket” of your bank. Your mortgage, as you know, is the amount you actually pay for the house. This number is increased (in spite of getting a low interest rate) by “points” which are nothing more than interest dollars paid up front. Added to this is the Escrow for your property taxes. This may be required, depending on the value of the property as the bank doesn't want to lose the property if you should fail to pay your taxes.

Principal, escrow and points will have you paying a lot more than the selling price of the house; however, some last minute papers—usually not discussed until the moment of closing, and then just quickly mentioned and shoved under your nose for a signature—are mortgage life insurance and mortgage disability insurance which are often packaged together as “life and disability.” If you do your homework, you will find that you don’t need—or want—either.

Mortgage disability insurance is not a bad thing to have. Insurance professionals encourage people to have as much protection as they can afford. Nevertheless, they see two problems with taking out disability insurance that is specific to the mortgage. First, the policies are often so restrictive, that while the premium may be low, it may be impossible to collect. Secondly, while it would be nice to have a way to pay your mortgage if you became disabled, the mortgage probably isn't your only bill. With mortgage disability insurance, you pay a premium and the insurance benefit is collected by the bank—if you qualify to receive benefit. You would be better off with private disability insurance that replaces most of your income. Thus you would be able to maintain your style of living and pay your bills as well. The better disability insurance policies do not require you to be fully disabled. You are only required to be unable to perform your current job. Of course, you need to work with an agent or financial advisor to be sure you get a policy that will do all you want it to do.

Mortgage disability insurance, like mortgage life insurance is expensive for what you will get from it. Since benefits are rarely paid, the premiums are pure profit for the lender. There are better ways to get this type of protection, but by the time the last bit of paper work for a mortgage is completed, the average home buyer is so eager to finish the paper work and take possession of the property that it is relatively easy for the lender to add a few more pieces of paper, explaining very briefly that this is your mortgage disability insurance which will continue your mortgage payments if you should become disabled. By passing it off in an understated, assumptive tone, it’s easy to create the impression that the insurance is a requirement or is just a matter of course. You need to remain alert, refuse the bank’s insurance policy and go purchase your own disability insurance.