Investing’s sucker bets—Mortgage insurance

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As you know Foxy Lady and I recently bought a house, which means we recently got a new mortgage.  If you’re anything like us, your mailbox get bombarded with offers to sell you mortgage insurance.  On the surface it seems like a good idea: if you passed away then your mortgage would be paid off.  Who would argue with that?  Well, that’s where Stocky will, as a public service, show you how these are terrible uses of your money.

 

Deceptive marketing

First, I want to point out that the fine people at Symmetry Financial Group are guilty, in my humble opinion, of some pretty shady marketing practices.  They make this form look like it’s some type of registration with local government or something.  Even at the top they put “second notice”, seeming to say “hey buddy, you ignored filling this out the first time and it’s really important that you do it.”

If you’ve had a mortgage before, you know there’s a ton of paperwork, much of it you don’t read and don’t really understand.  Also, there’s a ton of stuff that needs to be registered with the state, city, county, etc.  They folks are preying on those fears that you think this is something you need to do; need as in required by law or you’ll get fined or something like that.

Anyway, whatever.  I’ll get off my soap box.  I know people are doing their best to sell stuff, but the way they present this seems shady to me.

 

How it works

There is no way I would ever buy mortgage insurance, but for the purposes of this blog, I called them up to learn more.  I was able to speak to Audrey, a very nice lady by the way.

We had (notice the tense of that verb, it will become very important in a little bit) a mortgage where we owed $417,000.  This mortgage insurance will completely pay off our mortgage if either Foxy Lady or I pass away.  Of course nothing is free in this world, so we are offered that peace of mind for the low, low price of $106 per month.

That’s the basics, but there are a couple wrinkles.  We could get the coverage just for Foxy Lady (since she’s the rodent-winner) or just for me (since I’m the cubs’ primary care giver).  That monthly price goes down if you just want to cover one home owner instead of both.

 

Why it’s not worth it

We’ve talked about life insurance before, and this is really just another type of it.  But when you start to look under the hood of this type, you see that it’s a really, REALLY bad deal.  Listed in order of badness, here are the reasons I think mortgage insurance is a sucker’s investment:

  1. It’s really expensive—Foxy Lady and I each have insurance policies that cost us about $50 per month and would pay out $1.5 million if either one of us died. This policy costs $106 per month and would pay out a maximum of $417,000 if either one of us died.
  2. Double dipping—At our ages, the most likely cause of death for Foxy Lady or me is an accident. Given that, there’s a fairly good chance that both of us would perish in the same accident—we drive together a lot, vacation together, sleep in the same bed, etc.  If we both died our life insurance would pay both our policies, but with mortgage insurance if both of us die, they only pay the mortgage, not twice the mortgage.
  3. Dissolving payout—The policy is meant to pay off your mortgage. When we first got our mortgage it was $417,000.  Today it is $412,900.  A year from now it will be $403,700, and ten years from now it will be $290,500.  So this policy is set up to pay you less with each month that passes.  Maybe today you look at it and say, maybe $106 a month is worth a $417,000 life insurance policy.  But every month that payout gets less and less.
  4. Perverse incentives—Somewhat related to #3, if you are so disposed to want to pay off your mortgage faster (this is something I don’t recommend, but there’s some deep water here which can be the topic of a whole other post), you’re actively diminishing the value of the mortgage insurance. Sure, the fine people at Symmetry Financial Group love this because if you do pass away the amount they give your loved ones is less.

 

So there you have it.  Whenever I get these in the mail I instantly round-file them (unless I need to take a picture for a column).  I just think they’ll a really bad deal.  If you are concerned about what would happen to your loved ones in the event you die, which can be very valid, get normal life insurance.  You’ll get much more bang for your buck.

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