Mortgage life insurance is a form of

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

specifically designed to protect a repayment mortgage. If the policyholder were to die while the mortgage life insurance was in force, the

policy Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an orga ...

would pay out a capital sum that will be just sufficient to repay the outstanding

mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

. Mortgage life insurance is supposed to protect the

borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

's ability to repay the mortgage for the lifetime of the mortgage. This is in contrast to

private mortgage insurance Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses ...

, which is meant to protect the lender against the risk of default on the part of the borrower.

The Mechanics

When the insurance commences, the value of the insurance coverage must equal the capital outstanding on the repayment mortgage and the policy’s termination date must be the same as the date scheduled for the final payment on the repayment mortgage. The insurance company then calculates the annual rate at which the insurance coverage should decrease in order to mirror the value of the capital outstanding on the repayment mortgage. Even if the client is behind on repayments, the insurance will normally adhere to its original schedule and will not keep up with the outstanding debt. Some mortgage life insurance policies will also pay out if the policyholder is diagnosed with a

terminal illness Terminal illness or end-stage disease is a disease that cannot be cured or adequately treated and is expected to result in the death of the patient. This term is more commonly used for progressive diseases such as cancer, dementia or advanced h ...

from which the policyholder is expected to die within 12 months of diagnosis. Insurance companies sometimes add other features into their mortgage life insurance policies to reflect conditions in their country’s domestic insurance market and their domestic

tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...

regulations.

The Controversy

Based on the mechanics of the product, mortgage life insurance is a

financial product Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies ...

which paradoxically declines in value as the client-borrower pays more

premium Premium may refer to: Marketing * Premium (marketing), a promotional item that can be received for a small fee when redeeming proofs of purchase that come with or on retail products * Premium segment, high-price brands or services in marketing, ...

to the insurer. In many cases, traditional

life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the dea ...

(whether

term Term may refer to: * Terminology, or term, a noun or compound word used in a specific context, in particular: **Technical term, part of the specialized vocabulary of a particular field, specifically: ***Scientific terminology, terms used by scient ...

or permanent) can offer a better level of protection for considerably smaller premiums. The biggest advantage of traditional life insurance over mortgage life insurance is that the former maintains its

face value The face value, sometimes called nominal value, is the value of a coin, bond, stamp or paper money as printed on the coin, stamp or bill itself by the issuing authority. The face value of coins, stamps, or bill is usually its legal value. Howe ...

throughout the lifetime of the policy, whereas the latter promises to pay out an amount equal to the client's outstanding mortgage debt at any point in time, which is inherently a decreasing sum. Hence, mortgage life insurance is extremely profitable for lenders and/or insurers and equally disadvantageous to borrowers. In addition, lending banks often incentivise borrowers to purchase mortgage life insurance in addition to their new mortgage by means that are on the verge of tied selling practices. Tied selling of a product of self or of an affiliated party, however, is illegal in most

jurisdiction Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels. J ...

s. In

Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by to ...

, for example, this practice is explicitly forbidden by Section 459.1 of the

Bank Act The ''Bank Act'' (1991, c. 46) (the ''Act'') is an act of the Parliament of Canada respecting banks and banking. History The ''Bank Act'' was originally passed in 1871. The terms of the ''Act'' provide for a statutory review of the ''Act'' ...

(1991).Section 459.1 of the Bank Act
from the

Department of Justice (Canada) The Department of Justice (french: Ministère de la Justice) is a department of the Government of Canada that represents the Canadian government in legal matters. The Department of Justice works to ensure that Canada's justice system is as fair, ...

, retrieved on June 10, 2011. Finally, mortgage life insurance is not required by law. Client-borrowers decide whether to protect property with an insurance product. Similarly, the choice of insurer is completely unrestrained as well. Because of these suboptimal qualities of mortgage life insurance, the product has been subject to sharp criticism by financial experts and by the

media Media may refer to: Communication * Media (communication), tools used to deliver information or data ** Advertising media, various media, content, buying and placement for advertising ** Broadcast media, communications delivered over mass e ...

across

North America North America is a continent in the Northern Hemisphere and almost entirely within the Western Hemisphere. It is bordered to the north by the Arctic Ocean, to the east by the Atlantic Ocean, to the southeast by South America and th ...

for over a decade.Mortgage insurance: Not always a sure thing
from

CBS CBS Broadcasting Inc., commonly shortened to CBS, the abbreviation of its former legal name Columbia Broadcasting System, is an American commercial broadcast television and radio network serving as the flagship property of the CBS Entertainm ...

Canada, retrieved on June 10, 2011.Does mortgage insurance make sense?
from CNNMoney.com, retrieved on June 10, 2011. This has arguably led to fewer banks actively advertising this product in the recent years, although many still keep it in their portfolios. However, many critics fail to consider that in many cases where term life insurance is denied for health reasons, mortgage life insurance is still available (this does not guarantee that you are covered, but rather you're allowed to pay the premium of the insurance, the financial institution holds the right to deny the claim. This is due to "post-claim underwriting," meaning they check to see if you qualify for the coverage when you make a claim. This will lead to a refund of premiums and no coverage). As such, mortgage life insurance can cover the biggest expense left by a deceased breadwinner - i.e. housing costs. Thus, it is simplistic to dismiss it out of hand as disadvantageous to borrowers. Other controversies towards this class of products also exist due to the manner leads are created for mortgage protection insurance. Many of these leads pretend to be your bank or lending institution to get you to contact them. They also never state the actual organization that they represent because they are just mortgage protection insurance lead vendors.

Private mortgage insurance

The term ''mortgage insurance'' may in some contexts refer to ''private mortgage insurance'' (PMI), also known as ''

lenders mortgage insurance Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losse ...

''. Private mortgage insurance protects the lender instead of the borrower, although its premiums are payable by the borrower. This type of insurance is compulsory in certain jurisdictions for mortgages started with low

down payment Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transactio ...

s. In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

, subject to Homeowners Protection Act of 1998,Private Mortgage Insurance
from

Federal Reserve Bank of San Francisco The Federal Reserve Bank of San Francisco (informally referred to as the San Francisco Fed) is the federal bank for the twelfth district in the United States. The twelfth district is made up of nine western states—Alaska, Arizona, California, ...

, retrieved on June 10, 2011. a borrower who provides less than 20% down payment up front may be required to pay for private mortgage insurance until the outstanding mortgage is less than 80% of the value of the property.

References

{{DEFAULTSORT:Mortgage Life Insurance

Life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the dea ...

Life insurance

The Mechanics

The Controversy

Private mortgage insurance

See also

References