Notice of Mortgage Protection Insurance, a Scam.
Posted: May 31st, 2011 | Author: Joe | Filed under: Insurance | Tags: Insurance, Life Insurance, Mortgage Insurance, Mortgages | 4 Comments »I had never heard of Mortgage Protection Insurance until a week ago. I usually only get bills and credit card offers in the mail these days, but last week I got something new. Here’s how it happened…
The case of the misleading mailing.
The mailing was a nondescript brown envelope with an unfamiliar return address and nothing else on the outside besides my address and red letters that looked as though they were hand-stamped and read:
“Requested materials inside”
Requested materials? I don’t remember requesting any materials from anyone.
At first glance it seemed like a credit card application. I’ve received many in unmarked envelopes like this and even a few with “URGENT” printed in red on the front. But this seemed just different enough to make me curious.
When I tore into the envelope, I discovered a half-page typed form stating in large letters at the top:
“Notice of mortgage protection.”
It looked important, and had “return promptly” printed off to the side in bold lettering. Then I saw that everything below that heading was a bunch of fill-in-the-blank questions, with very detailed information about me and my mortgage.
Whoever this was knew the exact total outstanding amount of my mortgage. Once I saw that they were asking if I or my spouse use tobacco, I realized what this was – a life insurance product. My eye moved to the bottom and read:
“Pay your mortgage with your life insurance policy!”
I say this is a misleading mailing because I never requested anything from anyone about Mortgage Protection Insurance. Furthermore, the mailing was meant to look like something I should fill out and return ASAP or I might be jeopardizing my mortgage, and hence my home. I have no idea even who the insurance company is or how they got my info, though I assume my bank sold it to them as one of their partner relationships that I cannot opt out of.
What is mortgage protection life insurance?
So enough about this scam mailing, what is Mortgage Protection Insurance, and is it a good idea?
Mortgage Protection Insurance (MPI) is essentially a life insurance policy that will pay off the outstanding balance on your mortgage if you die before your house is paid off. Sometimes disability insurance is included, so your mortgage payments will be made for you in the event you become disabled and cannot work.
It is also sometimes called Mortgage Payment Protection Insurance (MPPI).
MPI vs. PMI – What’s the difference?
The financial services sector and insurance companies love their alphabet soup of acronyms. MPI and PMI sound similar, but they are two very different things.
PMI stands for Private Mortgage Insurance. You are required by law to pay for PMI when you purchase a home with less than 20% down payment. Private Mortgage Insurance is not for you and it’s not to pay your mortgage if you lose your job. It is solely for the bank, and it pays their insurance policy on you in the event that they need to foreclose on the property. Essentially, it helps mitigate the bank’s loss on the property if you default on your mortgage and there is less than 20% equity on the property.
Mortgage Protection Insurance on the other hand has nothing to do with the bank.
MPI is life insurance you buy from an insurance company and its only purpose is to pay your mortgage in the event you die. Another variant of this includes disability insurance, to make your mortgage payments if you become disabled and find yourself without a paycheck.
Reasons not to buy Mortgage Protection Insurance
There may be some cases where Mortgage Protection Insurance makes sense, but I think there are many reasons it doesn’t makes sense most of the time. Here’s why…
The first, and most obvious case is when you own your own home. No mortgage? No sense in paying for an insurance product that you could never benefit from.
Unfortunately, I do not fall into that category as I still have a mortgage I will be paying off for the next 20 years.
So here are the reasons I will not be buying MPI anytime in the foreseeable future:
- I already have a life insurance policy, and my mortgage was considered when determining the amount of the policy.
- Mortgage Protection Insurance is a waste of money.
Consider this: one of the main reasons for getting life insurance is to replace your income if you die. The idea being that your beneficiaries can have that money to use as they need. Paying off the mortgage should be one of the expenses factored into the coverage amount. One major problem with MPI is that the when you die, the insurance company will send a check directly to your mortgage company. Your beneficiaries have no choice in the matter.
What if your spouse wants to sell the house instead?
What if paying off the mortgage doesn’t make financial sense?
Consider that today’s mortgage rates are historically low. Rates will eventually rise, and most likely inflation will rise with them. So, it’s entirely possible that someone who takes out a mortgage today or refinances at today’s low rates and who is faced with a life insurance payout 10 or 15 years from now will be in a situation where they would actually make money putting that lump sum in a high yield savings account instead of paying off the mortgage.
Just such a situation happened in the early 1980′s. A person receiving a lump sum could have made 18% a year by putting that money in a money market account. Contrast that with the potential 7-10% mortgage rate and you’ll see why it was a money loser.
But it’s even worse than that. When the insurer pays the benefit for Mortgage Protection Insurance, it’s paid directly to the mortgage company- not the beneficiary. The beneficiary has no control whatsoever over the money, but worse still – MPI is a declining-benefit policy!
It’s called a declining-benefit policy because while the premium payment remains constant, the payout is reduced over time to keep up with the declining outstanding mortgage amount. That means you end up paying a steady amount in premiums, and get less back over time.
Compare that with fixed, lump sum payout of a standard life insurance policy and you see why MPI really only benefits the insurance company, not the insured.
As I see it, Mortgage Protection Insurance is a bad idea (generally speaking) because:
- You have no control over how the benefit payout is used – it pays off the remaining mortgage, and that’s it!
- The amount you receive in payout goes down, while premiums stay constant.
- Standard term life insurance is a better buy because it provides greater control and flexibility over how the payment is used, and provides a larger payout relative to MPI over time.
Given these reasons, and those stated further up, I’m taking a pass on Mortgage Protection Insurance.
They got your information from the recorder’s office. The details of a mortgage are public record.
That would hold the starting amount of mortgage, but as far as I know they don’t keep a record of current balance.
Cavalcade of Risk #133 now up, and your post is in it:
http://politicalcalculations.blogspot.com/2011/06/cavalcade-of-risk-133.html
Please let your readers know.
You sure did your homework and did a great job explaining everything. Let me say though in my defense, one who writes Life Insurance, that there is a 3rd option, one in which you already did to some extent. You say you already purchased Life Insurance with the Mortgage in mind. Good plan. But here is why meeting with an Insurance advisor like myself would be a good idea, even if it came in the form of a Mortgage Protection form you fill out.
Most folks today do NOT die as readily as they once did of traumatic diseases like Heart Attack, Cancer, or Stroke, and any one of the other diseases thare included in a Critical Illness Policy. When I am advising someone of the benefits of buying a Life Policy with their home in mind I recommned Living Benefits, ie…. Disability and Critical Illness. These can be purchased as riders on an NEW policy, or in your case can be purchased as a Stand Alone Product.
You have to admit that if the primary breadwinner had Life Threatening Cancer, but in the end totally recovered, your finances and your home could be jeapardized.
For example a $50,000 Stand Alone Critical Illness policy would pay you a Lump Sum
upon first diagnoses.
Finally the policies that I sell always pay the beneficiary, not the bank, so in this case many Agencies that write Life Insurance with the Mortgage in mind, offer
added value with educational information that I am providing with you today.
Hope some of this helps.
Thanks