TJ PorterBy T.J. Porter, WCI Contributor

If you’re like most people, your home is the most expensive thing you’ve ever bought and the biggest line item in your budget. With mortgage rates eclipsing 7% in 2023 and 2024, monthly payments for even modest homes have risen higher than in recent memory. What would happen if you suddenly lost your ability to work and earn an income? Could you afford the thousands of dollars it would take to pay your mortgage each month? Mortgage disability insurance is a unique type of disability insurance that aims to protect against that possibility.

But is it worth buying?

 

How Does Mortgage Disability Insurance Work?

Mortgage disability insurance is a type of disability insurance designed specifically to help make mortgage payments. Like traditional disability coverage, it replaces some of your lost income if you become disabled and can't work. However, the benefit is used to pay your mortgage bill and can’t be used for your other living expenses.

Some mortgage lenders offer this type of insurance. Otherwise, you can work with an insurance company or agent to buy a policy. If you become disabled while you still have a mortgage, the policy kicks in to pay your loan. The payments go directly to the lender. How much you pay for coverage depends on risk factors like your health, age, and the cost of your mortgage.

More information here:

How Much Disability Insurance Should You Buy?

How to Buy Disability Insurance

 

What Period Does a Mortgage Disability Insurance Benefit Cover?

Every insurance policy is unique, so it’s important to read the fine print and work with your insurer to understand how your unique mortgage disability insurance policy will work.

Typically, mortgage disability insurance has a waiting period of 30-60 days. If your disability lasts for more than the waiting period, the policy kicks in and starts making payments. However, most policies won’t keep paying forever. If your disability is temporary, they’ll stop paying your mortgage bill once you recover. Even if you do have a long-term disability, many policies have a maximum benefit period, only making payments for between 1-3 years. If your disability lasts longer than the benefit period, you’ll need to find another way to come up with the funds to pay your home loan or consider selling your home.

 

Can I Get Mortgage Disability Insurance with a Preexisting Condition?

Pre-existing conditions will make it much more difficult, though maybe not impossible, to get a mortgage disability insurance policy. It all depends on the nature of your condition and the risk that it poses to the insurer.

Some insurers refuse to offer coverage to anyone with a pre-existing condition, especially if you already have symptoms of that condition. Others are more flexible, especially for conditions that are unlikely to pose a major risk to your health or that can be managed effectively.

If you do find a willing insurer, be ready to answer questions about your condition during the health screening and expect to pay a higher premium than someone without a pre-existing condition.

 

Do I Need to Answer Health Questions to Get Mortgage Disability Insurance?

disability insurance mortgage

Yes. When an insurer sells you a mortgage disability insurance policy—or insurance policy of any kind—they’re effectively placing a bet. In this case, the insurer is betting that you’ll stay healthy and won’t need to file a claim. To get a full picture of the risk of selling you a policy, the insurer will want you to answer questions about your health and other risk factors.

More information here:

How to Get Disability Insurance Coverage Without a Medical Exam

Guaranteed Standard Issue (GSI) Disability Insurance

 

How Do I Know If I Have Mortgage Disability Insurance?

For the most part, you have to go out and look for mortgage disability insurance, so if you’re not certain whether you have a policy, you probably don’t.

You may be paying for private mortgage insurance (PMI), but that is a different type of mortgage insurance that protects the lender in the event that you default. In some rare cases, your lender may have included a policy when you got your mortgage, but that is not common. If you didn’t buy mortgage disability insurance on your own, you can double-check with your lender to confirm that you don’t have coverage.

 

Does Disability Insurance Pay Your Mortgage? 

Disability insurance is a much broader type of insurance. Unlike mortgage disability insurance—which pays your mortgage directly—short- and long-term disability insurance policies pay benefits directly to you. You’re then free to use the funds for whatever purpose you’d like, including paying your mortgage.

This is one of the reasons that traditional disability insurance is a better fit for most people. If you buy sufficient coverage, you can use the benefits to pay your mortgage bill and cover other living expenses.

 

How Much Does Mortgage Disability Insurance Cost?

The price of mortgage disability insurance, as with any type of insurance, depends on the risk the insurer is facing. In general, the younger and healthier you are, the less you’ll pay. Similarly, the less you owe on your mortgage and the lower the monthly payment, the less you’ll pay.

According to a report from CNBC, a traditional disability insurance premium costs between 1%-3% of your annual income each year and replaces 60% of your income. That means it costs 1.6%-5% of the benefit amount each year.

Because mortgage disability insurance is more limited and because benefits end after a few years, you can expect it to cost a fair bit less than that. In Canada, someone under 30 pays about $1.35 per month in premiums for every $100 in monthly mortgage cost while someone over 60 pays $6 per month for every $100 in monthly mortgage cost. American premiums are likely to be similar.

There’s no set price that everyone pays, so you’ll have to get quotes from insurers to determine the price for your coverage.

 

Who Offers Mortgage Disability Insurance?

Mortgage disability insurance is much less common than other forms of disability insurance, so it can be harder to find. Some insurers refer to it as mortgage protection insurance, so be sure to keep that in mind during your search.

Still, many of the biggest insurers in the United States—including State Farm, USAA, and Nationwide—offer policies. If you’re considering applying for a policy, be sure to take the time to shop around and compare rates to find the best deal.

More information here:

A Pain in the Butt – My Disability Story

 

Is Mortgage Disability Insurance Worth It For Doctors? 

For most people, including doctors, mortgage disability insurance is a nice idea but generally isn’t worth paying for. It has a lot of restrictions and limitations, benefits often last only a few years, and the payments go directly to cover your mortgage bill. While having one bill taken care of if you’re disabled is nice, it won’t help you pay your other bills, buy food, or cover other living expenses.

That’s why buying disability insurance, including long-term disability insurance, is essential. If you become disabled, you could lose your income almost overnight. Without disability insurance, you could go from earning hundreds of thousands of dollars per year to trying to make it on meager SSDI benefits. Disability insurance is often inexpensive and, should you become disabled, the benefits will help you replace your lost income and continue living as you were before your disability.

 

Have more questions about disability insurance and what kind of policies would be best for you? Hire a WCI-vetted professional to help you sort it out.

 

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