The Difference Between PMI and Mortgage Protection Life Insurance
Mortgage protection life insurance is a specialized kind of life insurance that should not be confused with Private Mortgage Insurance.
Where mortgage protection insurance provided by a life insurance company is designed to pay off your mortgage upon death, Private Mortgage Insurance (PMI) protects your bank or lender should you not be able to pay your mortgage for any reason.
Private Mortgage Insurance is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.
PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loanand make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.
Mortgage protection insurance that is provided by your life insurance company is mortgage protection insurance that has nothing to do with a lender’s PMI. The lender does not have access to mortgage protection insurance that benefits you. A PMI does not benefit you. It only benefits the lender should you default on the mortgage payment.
Be aware. A lot of times people think that they have mortgage protection. They don’t, you don’t automatically get it. When you’re making your PTI payments, you don’t have that coverage in your homeowner’s insurance. It is a totally different animal.
Homeowner’s insurance covers damage that happens to your home. The homeowner’s insurance company takes care of fixing it or sending you a check and then you fix it. That’s it. Homeowners insurance has nothing to do with covering you should you die or become incapacitated while the mortgage has not yet been paid off.
Life Insurance Mortgage Protection
Mortgage protection is a term life insurance policy where when you die your insurer sends a check to you or your beneficiaries that will pay off your mortgage and sometimes provide extra cash for them in the process.
If you die with a mortgage balance and have mortgage protection insurance policy, your insurer pays the remainder of your loan balance directly to the lender. Any heirs, such as a spouse or children, won’t have to worry about making future mortgage payments or losing the home.
The payment will be enough to pay off the mortgage and you or your beneficiaries will own your home free and clear. In a nut shell, mortgage insurance issued by a life insurance company is simply another a form of life insurance that is usually structured as a term policy.
Remember, a PMI only benefits the lender. It doesn’t benefit you.
Mortgage Insurance Term Life Insurance policy.
Mortgage protection is usually structured as a term life insurance policy. “Term” means that it’s going to expire at some point. All terms do, regardless of what you were once upon a time told when you started your term life insurance policy, they expire at the end of the term. That’s why they call them a term. Otherwise it’d be whole life insurance, which goes forever.
Whole life insurance goes until death. A term life insurance policy is structured as life insurance. This type of life insurance, whether it’s for mortgage protection or otherwise, is 100% independent from the lender, from the mortgage broker. Mortgage protection life insurance is not directly attached to your mortgage.
It’s only attached to you. That’s exactly the way you want it because lenders oftentimes sell a mortgage to other lenders or another company. So your mortgage may bounce around in different lending institutions. That’s not going to jeopardize your personal life insurance mortgage protection policy. Also, at some point you may pay off your mortgage and not need it anymore.
You may sell your home, get a new mortgage with another property. You may sell your home and start renting all of these things. So any changes to your home, to your mortgage, to your lender, to your mortgage broker, anything like that, it won’t change your mortgage protection policy. Your mortgage protection policy is locked and it’s attached to you or whoever is insured.
And that’s a beautiful thing. That’s exactly the way that you want it. It gives you complete control over it. No one else has control. Whoever the owner of the policy is, is the insured. It’s not going to be anyone else.
Upon your death, your beneficiary is going to receive a check. Let’s say you get, you have a $297,000 mortgage protection policy.
Let’s say you get it for 20 years. Usually the policy is between 10 and 30 years, by the way. You get a 20 year policy and in eight years you have something terrible happen, car accident, heart attack, whatever it may be, coronavirus, anything and you die. aYour insurance company is going to send to your beneficieries $297,000 even though in eight years, that mortgage has been paid down a bit.
Let’s say the mortgage is now down to $200,000. Your beneficiary still gets the full $297,000 of your original policy.Your spouse or beneficiary pays off the $240,000b owed and keeps the remainder, which is going to be $57,000. This money goes into your beneficiarie’s bank account and it can be used for anything they want.
Payment is Tax Free
Here is another advantage. the remaining amount is tax free. It is not going to be taxed money. You don’t have to worry about it being taxed and that’s a beautiful thing about this kind of a policy.
Think about it. Your beneficiary gets to keep the house and receives extra cash to use in any form they wish without having to pay any taxes on it. You can rest at peace they are thus being taken care of after you are gone.
Some policies out there. have tax repercussions but not these. Oftentimes the current mortgage amounts and the pay out of these policies don’t match up. And nine out of 10 times, the insured wanted to structure it in a way that it starts at the current mortgage amount so that you know that it’s going to be paid off whenever death occurs if it occurs during that term. Term policies are priced really well per thousand of coverage, They’re less expensive than whole life insurance policies.
Whole life Insurance Policies
Some people may not qualify for whole life mortgage protection policies because of health considerations For a full payout you have to be in pretty good health.
No major medical diagnoses, some moderate ones get you automatically declined for these. You cannot be on more than three prescriptions.
Over nine out of 10 times, whole life insurance policies include significant living benefits. What that means is, if something happens while you’re alive you can receive a large insurance check for you incapacitation or you get huge discounts on things. Or you don’t have to make your payments or whatever it is, but these are significant benefits.
For some medical diagnoses, they’ll just send you the full policy amount and the policy ends, even if you’re two years into the policy or three months into the policy. And let’s say it’s a $400,000 policy and you get a certain medical diagnosis, you can be covered. There’s a list in your agent can go over this with you of general categories of diagnoses. So if you’re within this category of diagnoses, then they send you $400,000. Depending upon the diagnosis, it might be less. It might be a $100,000, $200,000. They send you the money. If it’s all of the policy, then that stops the policy, regardless of how long it’s been.
Again, even if it’s just a month into it, they send you $400,000. You stop the policy. You can always get reinsured with a different company or you could just be done. And you’ve got that $400,000 tax free sitting in your account to help you and your family. And you can use it for whatever you need to. There are no restrictions on it. So that is loosely how it works.
Reach Out to Us
If you have other questions, please reach out to us. Mortgage protection is a fantastic way to protect your family. If you have a mortgage, a lot of times people get these policies, because let’s say you’re thinking about for you or for your spouse, vice versa.
A lot of times, one person passes away. It’s no longer affordable to keep the home and pay the mortgage. That one person can’t afford it only with two of them working together. Can they afford it? Mortgage protection insurance totally solves that and eliminates the foreclosure risk because the home is just paid off, that mortgage has gone forever and there is there’s no loan anymore to worry about.
Please giver us a call and we can go over all your life insurance options with you. o}our number (928) 323-0933. Whether you are looking for a mortgage protection policy or a hole life insurance policy we can help you. We hope this has been helpful. Good luck out there. Stay safe.