Job-loss Mortgage Insurance?

June 4, 2008 12:05 PM

Should I get job-loss mortgage insurance?

I've got a GREAT job, have no plans to ever leave or get fired, but for peace of mind, should I get insurance that will pay my mortgage for me if I ever run into an extended period of unemployment? My question is more along the lines of "is this type of insurance generally considered a waste of money?" Specific company/plan suggestions would be great as well.

posted by JPowers to Work & Money (9 answers total)

If it doesn't cost too much what could it hurt to have it? I lost my job in November and had a few months of forced vacation before starting another one. Would have been nice to have the mortgage paid via the insurance. Too bad for me.
If it is quite spendy though..., well you have to weigh the pro's and con's.
posted by a3matrix at 12:12 PM on June 4, 2008

You buy insurance to protect yourself from a loss you can't afford. It's usually not worth buying insurance for a loss you can afford.

So the first question is: What can you afford? (i.e. how long a period of unemployment can you afford)
posted by winston at 12:34 PM on June 4, 2008 [1 favorite]

Ok, watch out for the fine print. In the UK, at least, these policies have a rather questionable reputation:

• Some will pay only the interest on your mortgage, not the entire payment
• Some require you to register with The Job Centre (i.e., Unemployment in the US) and be actively searching for a new job, with additional restrictions on your rights to refuse work (and their continued payment)
• Some won't pay until you've been out of work for X months
• While others will pay for only Y months
• Some policies reduce any payments made by the amount of State benefits received

Clearly mortgage insurance, like any insurance can be part of sensible financial planning. But you've got to insure there are no surprises that might mitigate its overall value.

And JPowers, if you do purchase a policy I hope you never really need it!!
posted by Mutant at 12:59 PM on June 4, 2008

You need to make sure you read the small print on any policy. Some policies exclude the self-employed, will only pay out in limited circumstances or won't kick in for a few months. Here is an article at the Motley Fool on some of the problems with these policies. Note that this article is specifically referring to UK practices, which may be different from the US, but it illustrates how important it is to fully understand what you are signing up for.
posted by triggerfinger at 1:07 PM on June 4, 2008

Or....what Mutant said.

This is a perfect opportunity to speak to an independent financial advisor. There may be other insurance options out there for you that are cheaper/more appropriate etc.
posted by triggerfinger at 1:10 PM on June 4, 2008

Calculate the amount of your unemployment check (take-home) in case you lose your job.

Add in whatever you think you can be curtain of receiving as a severance package - if that's the sort of thing your company does.

Add in whatever "emergency" saving you have (if you have any).

Now you have a number.
can this number cover you living expenses (all bills, including rent/mortgage) plus enough leftover to live just slightly less comfortably than you do now?

If not, then buy the insurance - AFTER you make sure that there is no fee to cancel or lengthy minimum term to carry the insurance.

If your unemployment, plus severance and savings can cover your costs - you need to figure out how long that will last. If your money will last long enough to find another job - don't buy the insurance.

If you'll only be able to live and cover your own expenses for two months and you might need six months to find another job, buy the insurance.

Of course, lots of this depends on whether you can easily ratchet down your expenses if unemployed (can you cancel your cable/satellite - or are you in a contract? etc.) and how likely it is for you to be unemployed.

I've bought two houses since I took my current job. Neither time did I take the opportunity to buy this insurance. And yet, my employer hasn't been profitable for nearly six years (and no, it ain't a gov't job). We have layoffs all the time. I don't have any enormous amount of money saved up either. Knowing how much I had saved, plus unemployment, plus my severance made me feel confident that I didn't need to pay someone approximately $1500 a year in order to cover my mortgage payments for a few months in case I became unemployed.

Holy crap! By now, I would have payed $9000 to some insurance bastard - and that realization would have really pissed me off.

But do you know what pisses me off more? Knowing that I could have been paying myself unemployment insurance premiums every month this whole time - and I would have had nine fucking thousand dollars (plus) in an emergency saving account expressly for paying my mortgage in a time of need. I'm gonna start paying those premiums (into a money market account) starting this month.

Thank you for helping me figure my own situation out. Good luck with yours!
posted by terpia at 1:14 PM on June 4, 2008

Insurance like this is very unlikely to be worthwhile -- the premiums will be massive relative to the benefits, or the exclusions so broad as to make few claims allowed.

This isn't a conspiracy: any policy like this is going to suffer so severely from adverse selection (the tendency for people to buy policies when they expect to have a claim) that it would be hard for it ever to pay off were the coverage in any way generous.

What's funny is that base, government unemployment insurance is actually pretty cheap. It helps, of course that it is universal (no adverse selection) and also that employers are the rate-payers, not employees, giving them a good incentive not to lay off (create claims) indiscriminately.
posted by MattD at 1:26 PM on June 4, 2008 [1 favorite]

I would consider it a waste of money. The best insurance for such cases is having a savings account with 3-4 months worth of net income. Then instead of giving money away for insurance, you'll be collecting interest on the money.
posted by olegchet at 1:26 PM on June 4, 2008

Counter to what other people have said, it is not "very unlikely to be worthwhile". There are plenty of circumstances in which it could be a vital safety net. Obviously not for everyone though, and you ought probably talk to an independent financial adviser. Such advice is usually free (and regulated up to the eyeballs) in the UK, no idea about the US.

Circumstances you should weigh in your decision are your dependents (if any), whether you're in a profession / industry where you could easily swap to a comparable job, how well you're paid in relation to industry average, whether you have savings, what is your ratio of income to outgoings, whether you think that your job or company is economically vulnerable etc.

Personally I'd usually rather have some savings to fall back on, but this isn't always possible.
posted by bifter at 3:38 AM on June 5, 2008