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Mortgage Insurance May Be Costly, Unneeded

December 22, 1991|KATHY M. KRISTOF

Anyone who has purchased a house in the past few years is likely to have received a flood of mail from insurers and agents peddling "mortgage protection."

"Buying a home is one of the largest single investments a person can make. This kind of investment needs to be protected!" one mailer announces. "Will you leave your spouse with a deed or a debt?"

Industry experts are rarely ambivalent about the product. Some say it's a needed protection for consumers. Others say it's a useless product that costs too much for too little benefit.

What is mortgage protection? Generally, it is a hybrid of two types of insurance: credit and life insurance, or credit and disability insurance.

It covers only the amount of a mortgage debt. Its payout is triggered by the death or disability of the insured person. Some plans promise to pay off your mortgage in the event of your death. Others promise to make the monthly payments--or a portion of the payments--if you become disabled.

This is not the same as private mortgage insurance, or PMI, which some mortgage lenders require homeowners to purchase when they have minimal amounts of equity in the property.

PMI pays when a house goes into foreclosure and the borrower has been kicked out. It protects the lender from a large financial loss, but there's little benefit to the homeowner. It is simply required when one takes out certain types of loans, and usually can be canceled by the homeowner once the mortgage amount drops to about 75% of the home value.

Mortgage credit or mortgage life insurance helps the homeowner as well as the bank. If a person with mortgage life insurance dies, the insurer will generally pay off his or her mortgage in one lump sum directly to the bank. That helps the homeowner's heirs, because they don't have to worry about making the monthly payments or losing the home.

But these policies have a number of shortcomings, said Joseph Belth, editor of an industry newsletter called Insurance Forum.

First and foremost, it is an a la carte offering for people who generally need the whole meal. Unless there is a reason why a person would want to protect only his home as opposed to all his assets, it often makes more sense to buy a more comprehensive plan, Belth said.

Additionally, these plans are often highly restrictive. They frequently require that payment be made directly to the mortgage lender in the event of the insured person's death. The family usually cannot use it for another purpose, regardless of circumstances that might make other uses more advisable, Belth noted.

In addition, the value of the policy actually decreases over time as the consumer pays down his mortgage. Insurers who sell these policies say that's fine because the policyholder's insurance needs decline as the mortgage drops. But others note that an individual's insurance needs normally increase with age. Buying multiple policies, a la carte, to cover these other needs is both expensive and needlessly confusing, the skeptics say.

"We find that most people have insurance needs that increase that offset the decreasing demands of the mortgage," said Darrel Yuen, vice president of individual marketing at Transamerica Occidental Life. (Transamerica does not sell mortgage insurance.)

Finally, even though mortgage protection insurance covers less as a policy matures, the monthly premiums typically stay constant. That can make mortgage insurance a bargain in the early years but a bad deal in the final decade or two of coverage.

It is difficult, however, to compare the cost of mortgage coverage to similar life insurance products. There aren't a lot of similar products out there, and insurers are reluctant to compare "apples to oranges," they said.

One insurer who sells mortgage coverage did provide a comparison but asked that his company's name not be used. After looking at the chart, a company spokesman said he believed that a person would be better off with another type of policy.

Specifically: A 35-year-old male nonsmoker would pay $7,620 for a 20-year, $100,000 mortgage policy. But he'd pay only $5,580 if he took out a $100,000 declining-value term policy that promised the same payouts, applied as his heirs chose, this insurer said.

The savings gets bigger as the policyholder gets older too. A 45-year-old male would pay $16,940 for the same mortgage policy over a 20-year period but only $10,940 for a similar term policy.

If the policyholder died in the first 10 years, the mortgage insurance would be more cost-effective. The sum of 10 years of mortgage insurance premiums on a $100,000 policy is $2,560 versus $2,790 for the declining-value term policy for the 35-year-old. The cost is $5,060 for mortgage insurance and $5,470 for declining-value term for a 45-year-old after 10 years.

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