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Guide to mortgage disability insurance
Other types of disability policies might be a better option for covering your mortgage.
Some 25% of Americans will miss work at some point in their careers as a result of a disability, according to the Social Security Administration. Mortgage disability insurance is protection that can help you stay in your house if you’re unable to work.
What is mortgage disability insurance?
Mortgage disability insurance is a specific type of insurance designed to cover your monthly mortgage payments if you become disabled. Also known as mortgage payment protection insurance, this policy will pay for some or all of your monthly mortgage payments while you are disabled for a specified period of time.
Mortgage disability insurance is not life insurance, it will only cover your mortgage payments if you’re disabled due to injury or illness.
How does it work?
Mortgage disability insurance can either be bought as a standalone policy, or as a rider on a mortgage life insurance policy. Once you are diagnosed with a disability, either temporary or permanent, your policy will start paying a portion of your mortgage payment each month.
The policy typically has a 30 or 60 day waiting period, which means you will be responsible for paying the first or second mortgage payments after your disability diagnosis. Once the policy kicks in, the insurance company will directly pay your mortgage company, meaning you won’t see the money but your payments will be made.
The standard length of coverage on a mortgage disability insurance plan is one to three years, which is the most common amount of time for people to recover from a disability, or find alternative ways to pay for a mortgage.
Is mortgage disability insurance worth it?
Mortgage disability insurance may be worth it if you have a high-risk occupation or a pre-existing condition. Otherwise, you may be eligible for stronger disability insurance.
Mortgage disability insurance is usually guaranteed issue, which means that if you have health problems or work in a high-risk profession, then it will be difficult to find alternative life or disability policies.
Examples:
- You have pre-existing health conditions and work as a roofing contractor, which is considered a high-risk occupation. If you’re the sole breadwinner in your household, then a mortgage disability policy might make sense. It could be difficult for you to secure other forms of disability insurance, and your mortgage payments depend entirely on your ability to work.
- You’re healthy and work in a low-risk profession, such as an office job, then traditional disability may better fit your needs. This coverage often costs less and offers greater flexibility in how the benefit amount is used.
Mortgage disability insurance riders
This type of insurance is narrow and specific, which means the options for riders are limited.
Many times mortgage disability is a rider itself on a mortgage life insurance policy. Common riders available when purchased as its own policy include:
- Return of premium. Allows you to recoup the entire amount of premium you’ve paid for this policy over the course of the policy. It raises your premium during the policy, but you get that money back when the policy term expires.
- Related mortgage expenses. Extends your mortgage coverage to homeowners insurance, association fees and related expenses.
- Unemployment waiver of premium. Covers your mortgage payments while you look for new employment after involuntarily losing your job.
Pros and cons
Pros
- Guaranteed issue. For people with health issues or high-risk professions, the ability to secure some type of insurance is a plus.
- Protects one of your biggest assets. Your home is a big investment, and traditional life insurance applies only after you die. Whereas this policy covers your house payments if you’re disabled for an extra layer of protection.
Cons
- Only covers one expense. This insurance doesn’t cover auto payments, student loans or credit cards or any other debt.
- No flexibility. Unlike traditional disability, you have no say in how the money is used. It must be paid to your mortgage company, and if you sell your house, you don’t receive any back.
- Declining benefit. Though you’ll pay a consistent premium, as your mortgage decreases over time, so does the benefit amount. It may not make sense to keep this policy if you’re close to paying off your mortgage.
- Doesn’t cover home equities. Mortgage disability insurance covers your mortgage payments only, not home equity or related loans.
Alternatives to mortgage disability insurance
If you’re in good health or work in a low-risk profession, look into other options that can better fit your budget and needs:
- Short and long-term disability insurance. This insurance offers a stronger coverage than a mortgage disability policy, as it replaces a portion of your monthly income and lets you decide how you spend it.
- Supplemental disability insurance. Designed to fill the gap between the amount of income paid by a short and long term disability plan and the rest of your income.
- Traditional term life insurance policy. You might be able to add some type of disability rider to your term life policy. The benefits will likely be narrower than having a short and long term disability policy, but could provide some level of protection.
- Mortgage life insurance. Disability policies only cover you if your disabled, which means they are best used as a rider on a mortgage life policy. This allows you to cover both disability and premature death.
Compare disability insurance providers
Updated September 21st, 2019
Bottom line
Mortgage disability insurance is a useful protection plan that can help you keep your house if you’re disabled due to injury or illness. Unless you have health issues or work in a high-risk profession, there could be better options. Before buying a mortgage disability policy, compare disability insurance providers.
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