What's the catch with accidental death/disability mortgage insurance?

Question

I just bought a house. Now I'm getting ads in the mail every day or two trying to sell me accidental death insurance for my mortgage. (AKA critical illness mortgage insurance, mortgage protection insurance, mortgage life insurance) In summary they say they'll pay off the entire mortgage if something catastrophic should happen to me. They even say I will get back all of my premiums if I do not ever use the benefits.

I know "if something sounds too good to be true then probably it is". But I cannot figure out why in this case. What is the catch? Or is this something I should be signing up for ASAP?

Answer 1

Mortgage life insurance isn't a total scam, but it does have enough drawbacks that you probably shouldn't be signing up for it, ASAP or otherwise. I'm confident in saying this class of insurance, as a whole, isn't a scam because there are reputable organizations that offer it, such as the US Department of Veterans Affairs.

The main benefit is the part you already know: if something terrible happens to you, the insurance will pay off some or all of the remaining balance on your mortgage. Naturally, the exact details of when it pays and how much are up to the specific insurer you choose. Some policies are written to also help out in short-term crises, like temporary disability or job loss.

One of the drawbacks here is that your family won't be getting any of this money. The insurance company will pay your lender off directly. If you go with a standard term life insurance policy instead of mortgage life insurance, the benefits will go to your family, who can then choose to immediately pay off the mortgage or use some of the money for other pressing needs. A variety other resources online indicate that, ceteris paribus, term life insurance is generally not more expensive than mortgage life insurance, so you won't even have to pay extra for that flexibility.

As usual, you'll have to run numbers for your specific situation. And depending on your health situation, it may be easier to get mortgage life insurance than term life insurance.

Another drawback is that a mortgage life insurance policy won't pay more money than the mortgage has left on it. If you're unfortunate enough to get incapacitated after 29 years have passed, you'll have paid far more in premiums than the value of the paid-off mortgage.

And even if nothing terrible happens to you — as is likely — and you do end up paying off the mortgage the normal way, your refunded premiums will surely not have accrued a cent in interest. You will have basically been giving the insurance company interest-free loans every month for 30 years. Assuming some amount of inflation, what you get back will be worth even less than what you put in.

So, quick recap: mortgage life insurance is often a legitimate offering, but you can probably do better.