Personal Finance > Your Home
Covering your mortgage
July 11, 2001: 8:49 a.m. ET

Make sure your mortgage is covered in the event of a serious illness
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NEW YORK (CNNfn) - It can happen to anyone Ė a life-threatening illness drains your bank account and throws your loved ones into an emotional tailspin.

Critical illnesses are becoming far more common in this country as life expectancy rises. There are currently eight million people in the United States today who are living with cancer and another 4.4 million who have survived a stroke.

Such illnesses often lead to financial ruin.

According to statistics, nearly half of all home foreclosures occur when individuals become ill and are forced to pick up the sometimes exorbitant† deductibles not covered by their health insurance. Serious illness is also the number one reason for personal bankruptcy.

So what type of coverage do you need to ensure the bills get paid if the unthinkable should happen to you?

Consider disability insurance

Bob Hunter, an insurance specialist with the Consumer Federation of America, said disability insurance is perhaps the best way to protect yourself in the event of a critical illness.

"When the bread winner gets sick or dies, the bills can stack up," he said. "It's not just the mortgage. It's also the car payments, credit card bills and tuition."

    Disability insurance
  • Pays a percentage of your income when you cannot work
  • Money can cover mortgage payments and other bills
  • May supplement disability from your employer
  • There is a waiting period between becoming ill and receiving payments
    Premiums for disability and life insurance vary depending on the size of the policy, the age of the policyholder and a slew of other factors. But Hunter said the cost is quite reasonable, considering the peace of mind it buys.

    A 35-year old individual in good health, for example, can probably get a $250,000 policy for as little as $250 a year.

    Individuals with two children are encouraged to secure a policy equivalent to five to 10 times their current income.

    Keep in mind that many states require employers to provide some kind of short-term sick leave. Some large employers provide longer-term disability coverage, as well, and may pay a percentage of your salary for a period of several years up to retirement.

    Experts say all individuals should inquire of their employer what kind of short- and long-term disability benefits they provide.

    For extra protection, workers with employer-paid coverage might even consider buying additional insurance to supplement what they get from the boss.

    Most private disability policies will replace from 50 percent to 70 percent of income. Higher percentages are available, too, but be prepared for higher premiums. And don't forget that disability benefits are not taxed when you pay the premiums yourself.

    One other thing to consider: Most policies include a waiting period of 60 to 90 days before you become eligible to receive benefits after making a claim, even if you are not able to work during that period.

    As such, insiders say it's a good idea to have short-term cash reserves on hand to pay your bills while you wait for the benefits to kick in. Shorter waiting periods are available, although the policies will cost you more.

    To keep costs reasonable, many experts recommend you cover yourself with disability insurance only until the age of 65, at which point Social Security disability benefits kick in.

    Mortgage insurance will protect your home

    To capitalize on the need for services by the aging population, some insurance companies have begun offering special mortgage insurance to protect clients' homes in the event they can no longer work. Such policies cover your mortgage payments for a pre-determined period of time in the event you fall ill.

    Insurance companies offering these policies generally specify the illnesses for which they cover and who is eligible. Most cover for major health problems including heart attack, stroke and cancer. You may not be eligible, however, if several people in your immediate family have had critical illnesses in the past.

        Mortgage insurance
  • Covers your mortgage payments when you become critically ill
  • May not be eligible if you are at high risk of becoming ill
  • No waiting period to receive benefits
  • Benefits may continue even if you are still able to work
    The Critical Home Protector policy sold by National Guardian Life Insurance, for example, allows policyholders to choose the amount of the monthly benefit provided (usually the amount of the mortgage payment itself), which cannot exceed 115 percent of their monthly mortgage payment.

    One advantage of this particular policy is that with most critical illnesses, with the exception of life-threatening cancer, the benefit begins immediately after the policyholder has been diagnosed. In other words, there is no waiting period. This policy will also continue to pay, even if you are able to return to work, after suffering a serious illness such as a heart attack.

    The premiums depend on the size of the mortgage you are covering and the period over which the benefits are to be paid out.

    Click here for a mortgage calculator

    Hunter, however, offers a word of caution.

    It may be true that individuals who have been diagnosed with a critical illness are at much higher risk of losing their home than the general population, he said, but that doesn't mean mortgage insurance is the best option.

    Hunter maintains that disability insurance is still the preferred choice because it is more flexible, allowing policyholders to allocate the money paid out however they see fit.†

    In the event of a serious illness, he warns, it is not just the mortgage payments that are put off. When a person becomes seriously ill they often find they owe additional money for their medical care that is not covered by health insurance. Moreover, critically ill individuals with small children often have to hire additional help to care for their kids.

    As the name would imply, mortgage insurance covers just the mortgage payments, Hunter said, which covers the bank perhaps more than the individual who is sick.

    He further notes that the Consumer Federation of America generally does not endorse a piecemeal approach to purchasing insurance protection.

    "If you were going to buy a car you don't buy the tires one place and the engine in another," said Hunter. "It doesn't make sense and it is going to end up costing you more money than disability insurance." graphic


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    Consumer Federation of America

    National Guardian Life Insurance

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