Monday, February 1, 2010

Mortgage Insurance - a total ripoff

When I say mortgage insurance, I am not talking about the kind of insurance you may be required to get, by your lender, if you make too small a down payment. That is also a kind of rip-off as well, and an indication you may be stretching yourself financially.

What I am talking about is the kind of mortgage insurance you will get offers for in the mail. You may get one with regard to a car loan or credit card.

"Pay off your mortgage if you die!" they cry, "Protect your family from high bills!"

The theory is this, if you die, they pay off the mortgage. Some more ambitious plans offer this service if you are disabled as well. Why isn't this a good deal?

Well to begin with, it basically is a life insurance policy, with a declining coverage - the balance on the mortgage. And the rates for this life insurance policy are astronomical - 2-5 times more than a conventional term policy.

Worried about leaving your spouse with a mortgage? Well, for half the cost of these "protector" plans, you can get a term life policy with twice the coverage. Such plans may be available through your local insurance agent, or organization (ABA, etc.), credit untion, or whatever. They are so common, you trip over them. And the rates are so competitive, it pays to shop around.

Worried about disability? Well you can buy disability insurance as well - often for far less than what these companies charge. But even then, I would caution you. Insurance agents are good at selling these policies, but in reality, the odds of you becoming disabled are pretty slim. And if "shit happens" as they say, you'll likely find a way to make ends meet - by collecting social security disability, using your retirement money, selling off properties, etc. Disability insurance doesn't protect you, it protects your possessions.

Car loan insurance is even more ridiculous. And many young people buy it, too. If you die, who cares if they repo your car? And frankly, paying $25 a month extra so your $10,000 loan is insured for three years is more than ridiculous.

Credit card companies are jumping on this bandwagon with a new twist - they offer to pay off your credit card if you lose your job involuntarily. They are playing off people's FEARS, and as we have discussed before, acting out of fear is never a good idea.

If you want insurance, then buy it. But walk away from mortgage, car loan, or credit card insurance, as it is horribly overpriced.

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