Why Does Your Mortgage Insurance Cost What it Does?

by Michael M. Callender


You can count on three main factors affecting the premium of your mortgage insurance. Given the same policy, the premiums can be different based on how big the mortgage is, how old the insured is, and whether it is a smoker.

Both mortgage life (to guarantee payment of the home loan at the death of the insured) and disability (to provide income for paying the mortgage in case of the disability of the insured) use the same factors to price the premiums.

The age and health of the insured is of the utmost importance to the insurance company, since they will determine for its actuaries what the chances of paying out are. Many mortgage life and disability policies do not require a physical, merely a statement of health condition. This can be chancy, since any statement that would infer good physical can be used negatively if the claim is processed and it turns out a health condition (or smoking) was kept from the insurer. Don’t think you can claim that you are a non smoker and then collect on the insurance because the insurance company didn’t know. They will know, and if you have made incorrect statements on the application, you can jeopardize the entire policy.

There are two typical policies, regular, which includes smokers and non smokers, which does not (and also includes those who have not smoked over the last 12 months.) Of course, a smoker’s risk is already priced into that policy.

Bear in mind that insurance policies that are writable without a physical have already priced the additional risks into the premium. So those who are in very good health should consider going for the physical to see if lower premiums are available for him.

These factors can greatly affect premiums, and the premiums for a 50 year old, with the same amount of mortgage, can be more than twice as much as that of a 38 year old. Reducing the principal on the mortgage adjusts the premium by a few dollars, so it is easy to see that the actuarial tables are what drives this pricing. It is not a surprise since, in addition to the risks of age and health, the chances of the premium being paid longer are much greater.

The amount to be be insured is, of course the next main concern of the policy. Prior to the $250,000 threshold, however, there is not a great impact on prices. Larger mortgages need a higher premium and the insurance company will also require an assessment to prove the worth of the property.