What’s mortgage disability insurance?

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Mortgage disability insurance provides financial resources to homeowners who become disabled and unable to make mortgage payments. Lenders may require it, and coverage varies depending on the insurance contract.

Mortgage disability insurance is a type of insurance coverage that provides resources to mortgage holders in the event that they become disabled and can no longer earn income to make mortgage payments. Sometimes referred to as disability mortgage insurance, the terms of coverage typically require a recognized medical authority to declare that the homeowner is temporarily or permanently disabled and unable to work or use other sources of income to make payments. Obtaining this type of coverage helps protect the homeowner from the possibility of foreclosure at a time when he or she needs to focus more on health issues and recovering or building skills to cope with permanent disability.

While many consumers don’t think in terms of a serious illness or disability occurring during their working years, the potential for experiencing at least one extended period of time when the owner is unable to work is relatively high. Without the presence of mortgage disability insurance, the chances of losing your home during this period are significant. This is especially true if the owner has relatively few financial resources outside of the income generated by having a job that he is unable to perform during the illness. From this perspective, maintaining mortgage disability insurance can help alleviate concerns about at least some of the household’s finances and allow the homeowner to focus on getting better and eventually returning to work.

Lenders tend to be favorable to mortgage disability insurance, and some make it necessary to secure and obtain this type of coverage as part of the criteria for approving a mortgage application. In some cases, the cost of the premium is included in the monthly mortgage payment and is submitted to the insurance company on the homeowner’s behalf. Since the coverage helps minimize risk for both the homeowner and the lender, it’s not unusual for banks and mortgage companies to negotiate special rates for this type of insurance plan that are then passed on to homeowners.

The scope and structure of coverage provided by mortgage disability insurance will vary somewhat, depending on the terms and conditions found in the insurance contract. Many contracts will include detailed information about what types of health problems are covered. For example, some will require the homeowner to be out of work for a specified period of time, and certain other benefits to be exhausted before the insurance plan begins to cover mortgage payments. Some policies are structured to make payments directly to the mortgage lender on behalf of the insured party, while others require claims to be filed after each mortgage payment is made, allowing the insurance company to verify payment to the lender and then reimburse to the policy holder.

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