If you died today, how would your spouse or other heirs make the mortgage payment on your home?
It's not a very comfortable question to ask yourself, but it's one you should answer. Thousands of people lose their home every year because the death of their spouse or parents leaves them with no way to pay for their housing.
A growing number of lenders and insurers are offering a solution to this problem by selling so-called "mortgage-life" or "credit-life" insurance policies, which can pay off some or all of your loan should you die prematurely.
But at the same time, these financial institutions are drawing fire from consumer advocates who say they're ripping off the public by charging exorbitant premiums. Equally bad, critics charge, many homeowners are paying for coverage they don't even know they have.
In some cases, borrowers are taking out policies without realizing that their heirs won't be paid should the policyholder die of natural causes. Some of the plans only pay if the borrower dies in an accident.
"We think there are an awful lot of consumers out there being gouged," said Kevin Hennessey, a spokesman for the National Assn. of Insurance Commissioners.
The NAIC represents more than 40 state insurance commissioners, who are in charge of regulating and overseeing insurance companies that operate within their jurisdictions.
The policies are usually sold through one of two methods. Some lenders offer the insurance while the borrower is in escrow. Other institutions tout the policies' virtues by mail, often through flyers stuffed into monthly mortgage statements.
But while credit-life policies might be appealing to homeowners worried about their heirs, they're actually "the nation's worst insurance rip-off," according to a report by the Consumer Federation of America.
The federation--which represents about 250 consumer groups across the nation--said insurers pay back only 43% of the premiums they collect through credit-life policies, compared to the 75% they pay back on standard life insurance.
If regulators imposed payout levels of 75% on credit-life policies, the CFA report said, consumers would have saved more than $900 million in 1988 alone.
Importantly, the study only looked at credit-life insurance that consumers purchased when they bought cars, appliances and furniture.
There are no comparable figures for overcharges on home loans, but a spokesman for the federation said it's probably much higher because houses are more expensive than cars and other items.
Insurers who offer mortgage-life and other types of credit-life policies defend their charges by pointing out that the policies are easy to get and, in some cases, the only type of insurance that old or sick people can obtain.
"One of the nicest things about credit-life insurance is that it's convenient to purchase," said Gene Grabowski of the American Council of Life Insurance, an insurers trade group. "You can just take it out when you get the loan instead of having to do a bunch of paperwork later.
"Plus, you usually don't need to get a physical examination. That's an important factor if you're an older person or if you're ill."
But Stephen Brobeck, executive director of the CFA, complains that many borrowers don't even realize they have the coverage because "a lot of institutions bury it in all their loan paperwork.
"If you look at the cost of these policies and all their fine print, you'll see that you'd probably save yourself a lot of money just by increasing your standard life-insurance policy," Brobeck said.
Even Grabowski, spokesman for the insurers, admits that many borrowers who are worried about how their survivors will pay for housing could save money by shunning credit-life policies and simply increasing the amount of their life insurance.
For example, one 31-year-old homeowner who recently called National American Life Insurance--which writes mortgage-life policies for several lenders--was told that it would cost $24.96 a month for a policy that would pay off his $156,000 loan in the event of his death.
But, he was told, the policy would only pay off if he died accidentally. It would be void if he died of natural causes.
By comparison, Pat Paige, an insurance broker and president of the Los Angeles Life Underwriters Assn., said that same borrower could get a 10-year, $156,000 life-insurance policy for $15.75 a month--and it would pay out regardless of how the borrower died.
If the borrower was 40, Paige could offer a $156,000 policy for $26 a month. And while that price would be about $12 a year more than National American would charge, it would still pay off regardless of the cause of death.
A 50-year-old borrower, however, would have to pay $44 a month for a 10-year policy offering $156,000 in coverage. He'd save more than $200 a year by using National American, although he'd have to accept that the National American policy wouldn't pay off if he died of natural causes.