Mortgage redemption insurance
Mortgage redemption insurance is a variant of decreasing term insurance on the life of a party that is obliged to make the mortgage payments. If the insured dies, the mortgage balance is transmitted to the lending institution by the insurance company. As a result, insured's survivors gain claims-free title to the mortgaged property. This specific insurance type is often recommended during the lending process. Mortgage redemption insurance protects both survivors of the insured and the lending institution[1].
It is typical for the mortgage loans that each payment of equated monthly installment results in decreasing the outstanding principal. The insurance might be constructed in such a way that the benefit amount at any point in time is equal to the amount of owed principal. In this example, the length of the mortgage and the policy term are corresponding[2].
Joint mortgage redemption insurance
One of the variants of the described policy is the joint mortgage redemption. It is used to cover more than one person's life, usually two people. This variant is dedicated to people who finance the loan using their joint income and who own the property together[3].
Comparison of policy types
There are two main policy types considered when taking a mortgage:
- mortgage redemption insurance,
- decreasing term life insurance.
These two insurance types often appear identical to the consumers and are commonly confused. The main difference between the two types is wh the beneficiaries are. The beneficiary of mortgage redemption insurance is the mortgage holder, most likely the lending institution. Survivors of the insured receive the benefit in the form of a title to the mortgaged property. It is different with decreasing term life insurance where survivors of the insured are the beneficiaries. Survivors can either invest received proceeds or retire the mortgage. When the mortgagor dies, the responsibility for loan payments is often transmitted to the survivors who may choose to continue the payments or use the received proceeds to retire the mortgage. With the mortgage redemption insurance, survivors have limited flexibility as they are indirect beneficiaries only[4].
Footnotes
| Mortgage redemption insurance — recommended articles |
| Guaranteed renewable — Collateral assignment — Indemnity bond — Mortgage deed — Waiver of premium rider — Tenancy at Will — Demand loan — Absolute assignment — Free Look Period |
References
- Angell, R. J., Eatman, J. L. (1982), The hidden cost of mortgage redemption insurance, "The Journal of Insurance Issues and Practices", Vol. 5, No. 2.
- Bardhan A., Karapandža R., Urošević B. (2006), Valuing Mortgage Insurance Contracts in Emerging Market Economies, "The Journal of Real Estate Finance and Economics", Vol. 32 Issue 1.
- Chen M. C., Chang C. C., Lin S. K., Shyu S. D. (2010), Estimation of Housing Price Jump Risks and Their Impact on the Valuation of Mortgage Insurance Contracts, "The Journal of Risk and Insurance", Vol. 77 No. 2.
- Kutty, S. K. (2008), Managing life insurance, Prentice-Hall of India Private Limited, New Delhi.
- McPherson, J. R. (1957), The Trillion Dollar Question, "The Journal of Insurance", Vol. 24, No. 2.
- Sparks, K. K. (2019), Insurance activities of banks, Wolters Kluwer, New York.
- Steuer, T. (2010), Questions and answers on life insurance: the life insurance toolbook, Life Insurance Sage Press, Alameda.
- Yuzon I. A. F. (2007), Community Mortgage Program: a Case Study of the ALCOP Homeowners Association, Inc., "Philippine Journal of Labor and Industrial Relations". Vol. 27, Nos. 1, 2.
Author: Magdalena Wojslaw
