It’s easy to understand the value of having homeowners insurance, auto insurance, and term life insurance. These standard insurance policies are affordable, easy to get, and clear cut regarding what they cover and why you need them. But there are countless other insurance products on the market that aren’t so easy to understand.
One of those is mortgage disability insurance.
What exactly does it cover? How is it different from regular disability insurance? Is this an insurance policy that physicians should have?
From what it costs to who it benefits, here’s everything that physicians should know about mortgage disability insurance.
What is Mortgage Disability Insurance?
Mortgage disability insurance is a mortgage loan protection plan that covers your mortgage payments if you become disabled, lose income, and lose your ability to pay your monthly home loan.
The coverage amount of your policy can only cover mortgage payments. The benefits you receive cannot cover any other monthly expenses you have. The amount of coverage has nothing to do with your monthly income; it is based solely on your mortgage balance.
Mortgage disability insurance is sometimes sold as a standalone policy and sometimes offered in conjunction with a mortgage protection insurance policy (MPI). MPI benefits pay off your mortgage if you pass away; mortgage disability insurance pays your monthly mortgage if you become disabled.
How is Mortgage Disability Insurance Different From Regular Disability Insurance?
While mortgage disability insurance can be beneficial in certain circumstances, it is far more restrictive than traditional disability insurance.
If you become ill or disabled, regular disability insurance will pay you a lump sum of benefits per month that you can spend on anything you like.
Disability insurance benefits pay for anything you need such as utilities, student loans, food, car payments, mortgage payments, and any other financial obligations you may have. There are zero restrictions in how or when you can spend your benefits.
Mortgage disability insurance, on the other hand, has much more stringent limitations. Again, it can only pay your mortgage. It cannot pay for anything else.
In general, physicians and other high-income earners are much better off having a disability insurance policy rather than mortgage disability insurance. However, there is one reason that makes mortgage disability insurance a more attractive option for some.
What Makes Mortgage Disability Insurance Attractive?
Almost anyone can get a mortgage disability insurance policy and get one quickly. These policies do not require a lengthy underwriting policy based on your health or contingent on a medical exam.
Disability insurance policies, on the other hand, have substantially more underwriting requirements and base your rates on your current medical conditions and health history.
Mortgage disability insurance is almost always guaranteed. These policies are incredibly easy to get and are often far less expensive than disability insurance policies.
If your home is your greatest investment and you do not qualify for disability insurance, mortgage disability insurance offers some protection should you fall ill or become disabled.
How Does Mortgage Disability Insurance Work?
Wondering how a mortgage disability insurance policy actually works? Several factors make it quite different from other insurance policies you may already own or consider purchasing.
Unlike most insurance policies, you do not pay mortgage disability insurance premiums every month. Most are paid quarterly, semi-annually, or on an annual basis. Rather than making twelve payments per year, you only have to make between one and four payments, depending on the terms of your specific policy.
With a standard disability insurance policy, your monthly benefits are paid directly to you because you can use those benefits to pay for anything you want. With mortgage disability insurance, you’ll never see your benefits. They will go directly to your mortgage lender every month.
The benefit period is also an essential aspect of mortgage disability insurance. Benefit periods vary between as little as two or three years to as long as 20 or 30 years to cover the entire life of your mortgage.
The more years you owe on your mortgage, the longer your benefit period should be. Different insurance providers offer different benefit periods, so make sure that your insurance company provides a long enough period to cover your needs.
Like disability insurance, mortgage disability insurance requires that you select a benefit period and an elimination period.
The elimination period is the time between the date of your disability and the date that you are eligible to start receiving benefits. Most elimination periods vary between 30 and 60 days. Once your elimination period has ended, your lender will begin receiving payments every month.
Some policies also allow you to add optional mortgage disability insurance riders. One of those, called the return of premium rider, offers a significant benefit that most other insurance policies do not.
With the premium rider’s return, you can actually get some of your money back if you never become disabled and never need to collect benefits. With most insurance policies, the money you spend on annual premiums is not refundable, even if you never collect your benefits.
Just keep in mind you’re not eligible to get any of your money back if you sell your home before the benefit period ends.
It’s also important to know that mortgage disability insurance does not cover home equity loans. It only covers your monthly mortgage amount, nothing more, nothing less.
You may also like: The Pros and Cons of Paying Off Your Mortgage Early
How Much Does Mortgage Disability Insurance Cost?
Many factors will determine the cost of your monthly mortgage disability insurance.
The waiting period and benefit period you choose will have a big impact on your annual premiums. But the critical factor in determining your premium and coverage amount is based on your mortgage amount, including the principal and interest owed to your lender.
Mortgage Lenders vs. Independent Insurance Agencies
Some mortgage lenders offer mortgage disability insurance policies to borrowers along with their mortgages. You can also choose a policy with an independent insurance agency with no affiliation with your lender.
If you don’t already have disability insurance, your independent insurance agent may recommend that you seek mortgage disability coverage as a basic protection for your loved ones.
One thing that is unique to mortgage disability insurance is that most premiums decrease over time. Why? Because your coverage amount decreases as your mortgage balance decreases. You only need enough coverage to pay for your monthly mortgage payments at any given point in time.
Should you choose to add optional riders to your coverage, the cost of your annual mortgage disability insurance premium will increase. There are three main riders that most insurance companies provide.
The Return of Premium Rider
With this rider in place, you can actually get a portion of your premium payments back if your benefit period ends, and you never became disabled and never had to file a claim.
The Mortgage-Related Expenses Rider
All homeowners are responsible for paying homeowner’s insurance premium, and some also pay Homeowners Association fees. With this rider, you can also collect benefits to cover these mortgage-related expenses, even though they are not part of your mortgage balance.
The Involuntary Unemployment Rider
Some insurance providers offer the involuntary unemployment rider, which will cover your mortgage payments should you face unemployment through no fault of your own.
Should Physicians Have Mortgage Disability Insurance?
For physicians and high-income earners, long-term disability insurance is a much better and more comprehensive option than mortgage disability insurance.
That is because long-term disability insurance allows you to use your monthly benefits to pay for any expenses you may have.
Disability insurance benefits provide you with a percentage of your monthly income. How much coverage you can take is based on your health, age, and the amount of disability income you wish to receive. No restrictions or limitations are placed on how you spend your benefits.
Mortgage disability insurance is not a substitute for disability insurance. It is only a viable option for people in high-risk occupations or with significant health issues who cannot get a traditional long-term disability insurance policy.
As with all retirement planning tools and insurance products, it’s always best to consult with a professional for financial advice. Financial planners and retirement planning experts will be able to guide you into which disability insurance product is best for you.
Disability Insurance is a Better Option
There is no question about it: disability insurance is a better option for physicians.
Here are just a few of the reasons why every physician should have disability insurance instead of mortgage disability insurance.
Future Income Protection
Whether you’re planning to retire in your 50’s or work well into your 60’s, you’ll need to start planning for retirement long before you hit retirement age. Disability insurance coverage is the single best way to protect your future income and allow you to prepare for the retirement you want.
If you were disabled or injured and lost your income, how would you cover your expenses? How would you take care of your family? How would you get through the month, let alone contribute to a retirement plan for future security?
Disability insurance allows you to collect benefits of up to approximately 60% of your current salary. For most physicians, the peace of mind knowing that they have a way to still bring in income if they can’t work is well worth the monthly cost.
Additional Benefits with Optional Riders
Depending on your chosen insurance company, most disability insurance policies offer the option to add all sorts of riders. And these riders offer significant benefits far beyond your monthly coverage.
For example, you can add a student loan rider to pay off student loan debts. You can add a rider to cover your income if you need to take time off to care for a loved one. You can add riders that will make payments to your retirement accounts so that you can continue to invest and save for your retirement.
With various choices in elimination periods, benefit periods, and riders, it is easy to customize a plan that fits your own and your family’s needs precisely.
You Have Lots of Debt
The higher your monthly expenses are, the more important it is to maintain your income so that you can fulfill all of your financial obligations. From credit card bills to mortgages to medical school loans, physicians often find themselves in lots of debt.
Disability insurance protects you from lenders and creditors by allowing you to pay all of those bills with your monthly disability benefits.
You Own a Business
If you own a practice or are a partner in a practice, disability insurance is an absolute must. You can even add on riders or take supplemental policies explicitly designed to cover your business and business-related expenses.
Collecting benefits through a mortgage disability insurance policy pays for one thing: your mortgage. You cannot use those benefits to pay for any other expenses. In fact, the benefits will not even go to you — they will go directly to your mortgage lender.
And while your home mortgage may be your most significant expense and your biggest asset, there are other ways to protect it, such as with long-term disability insurance.
If you are in poor health and cannot find an insurance company to underwrite a disability insurance policy, mortgage disability insurance is optional. But for the vast majority of physicians and high-income earners, long-term disability insurance is the preferred plan.
For more information on disability insurance, tax planning, and retirement planning, contact Physicians Thrive now.
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