Homeownership is part of the American dream. Disability is definitely not part of that dream, but it’s an unexpected reality for many Americans. If a disability prevents you from working, you could fall behind on your mortgage payments and risk losing your house. Mortgage disability insurance can help you keep your home while you focus on your health. However, a disability insurance policy that only covers your mortgage may not be the best choice. Before purchasing such coverage, explore all of your disability insurance options.

When you secure a home loan, you expect to be able to keep up with the payments. However, these expectations are probably based on the assumption that you’ll keeping earning a paycheck – what happens if a disability prevents you from working?

According to Debt.org, medical emergencies and illness resulting in medical debt are a key reason for foreclosure. Job loss or a reduction in income are other major reasons. When an unexpected disability occurs, many people experience both medical debt and job loss. This can be an untenable situation – if you don’t have the right insurance, you may lose your home.

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Making Monthly Mortgage Payments During Disability

  • Investopedia says you can usually miss around four monthly mortgage payments before your mortgage lender will start the foreclosure process. That could be it: four months of not being able to pay because you can’t work and you could lose your home.
  • A serious illness or injury can last much longer than four months. According to the Council for Disability Awareness, the average length of a long-term disability is 31.2 months – that’s more than two and a half years.
  • No matter how strong your work ethic is, a disability could keep you from earning a paycheck. This is why you need a backup plan. Disability insurance can ensure you take care of your mortgage payment even if an injury or illness prevents you from working.

However, not all insurance products are the same. You need to make sure you have the right disability insurance to protect yourself, your family, and your home.

Is Mortgage Disability Insurance Worth Buying?

  • Mortgage disability coverage offers important protection, especially when you consider that disability is far more common than many people realize. Each year, many people find themselves unable to work because of a disability – sometimes due to injuries (for example, from car crashes or bicycling accidents), but often due to diseases and other medical conditions (such as cancer or heart disease).
  • If you had to stop working because of an illness or injury, how long could you keep paying your monthly mortgage payments before you ran out of savings? Most people who need a mortgage have limited savings – otherwise, they would have bought the house with cash – meaning the answer is usually not very long.
  • Most mortgages last for 15 to 30 years. You may be healthy now, but you could experience a disability at any time – including in next 15 to 30 years. If you wouldn’t be able to keep paying your mortgage, it makes sense to buy some sort of coverage to protect yourself.
  • However, since a mortgage disability insurance policy is limited, it may not be your best choice.

Private Mortgage Insurance Does Not Protect the Homeowner

  • You may have heard that you need to purchase private mortgage insurance (PMI). This is fairly common for homeowners with small down payments : the mortgage company wants to protect its interests by requiring the borrower to purchase coverage.
  • This coverage protects the mortgage lender, but it does not protect the homeowner. According to the Consumer Financial Protection Bureau, PMI will not protect you from foreclosure or help you keep your home if you cannot make payments.
  • Of course, you’ll need to take out PMI if your lender requires it (you can pay through monthly payments or in a single upfront payment). However, if you also want to protect yourself from the risk of foreclosure, you should purchase an additional insurance policy.

Mortgage Disability Insurance Provides Some Homeowner Protection

  • Mortgage disability insurance pays the mortgage if you become disabled and can no longer work. This allows you to keep your home without worrying about monthly mortgage payments.
  • Mortgage disability insurance may be part of a mortgage protection insurance (MPI) package that also includes mortgage life insurance. Mortgage life insurance is similar to mortgage disability insurance. The difference is it pays the mortgage if the policyholder dies, allowing the heirs to keep the house without needing to make payments.

Individual Disability Insurance

  • An alternative option to consider is individual disability insurance. This is private insurance you can purchase to replace a portion of your income if you become disabled and can no longer work. Unlike mortgage disability insurance, individual long-term disability insurance is not tied to your mortgage: you can use the funds however you see fit.
  • For example, you may need to use most of the funds to pay your mortgage, but you can use some of the funds to cover things like utilities and groceries. If you’re still unable to work after you pay off your mortgage, you can use the monthly benefits to cover other costs.
  • Individual disability insurance usually costs around 1% to 3% of your income and many policies replace around 50% to 70% of your income if you file a claim. Different policies offer different benefit periods: some only pay benefits for a couple of years, others for a decade, and some continue until you reach retirement age.
  • If you can’t afford a robust policy, go for a slimmer policy that provides just enough coverage for your mortgage. As it’s an individual disability insurance policy, you’ll still have some flexibility when deciding how to use the benefits.

Comparing Individual Disability Insurance to Mortgage Disability Insurance

It’s reasonable to worry about the risk of losing your house in the event that you experience a disability. To protect yourself from this risk, your two main options are individual disability insurance and mortgage disability insurance.

Here’s how these two options compare:
  • Mortgage disability insurance covers your mortgage. Individual disability insurance offers benefits that you can use for your mortgage or other costs, which gives you much more flexibility.
  • You may be able to receive mortgage disability insurance in conjunction with a mortgage life insurance policy. Individual disability insurance does not typically come with life insurance, but you can purchase life insurance separately.
  • Mortgage disability insurance may come with some riders that offer additional benefits, but options are usually limited. Many individual disability insurance companies offer a wide range of riders.
  • The costs for either product can depend on many factors, including the amount of coverage you need, your risk level, and the insurance company. The best way to find out how much you’ll pay is to request a disability insurance quote.
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  • If you want protection for your mortgage as well as other costs, you need individual disability insurance. Learn more.