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Overpriced insurance?


Buying a home is time-consuming, expensive and often frustrating. Throw into the mix the thought of dying -- and leaving your spouse to pick up the tab on the house -- and it may be downright scary.

That may be why many homeowners overpay for mortgage life insurance, or buy it when they don't need it. Mortgage life insurance -- insurance that pays the mortgage if a homeowner dies -- may buy peace of mind, but it is rarely the wisest investment for the dollar, say financial planners and insurance agents.

Instead, the best way to protect your family may be no insurance or adding coverage to an existing life insurance policy, an option that gives homeowners greater flexibility.

"Like other forms of credit insurance, this tends to be overpriced," said Stephen J. Brobek, executive director of the Washington-based Consumer Federation of America. He recommends that homeowners ask three questions:

* Over the life of the mortgage, what are the premiums I will pay for the coverage? What are the premiums I will pay each year?

* What is the loss ratio? The loss ratio -- how much all customers receive back for the amount of premiums paid -- should be 60 percent, or 60 cents back for every dollar paid. Many mortgage life insurers pay out 40 percent or less, while term life policies pay out 50 to 75 percent.

* Do I need this product? If the answer is yes, Mr. Brobek said, then call a number of insurers and compare policies.

American homeowners took out $8.3 billion in coverage in 1992, the most recent year for which figures are available, bringing total coverage to $42.3 billion, according to the Washington-based American Council of Life Insurance.

Despite warnings from financial planners that mortgage life insurance is overpriced, some homebuyers consider it an attractive option. Premiums run as low as $30 per month for nonsmokers in their 30s on a $100,000 mortgage. And the payments are convenient, since most purchasers can simply add the amount to their monthly mortgage payment.

Jeffrey R. Beam, a State Farm insurance agent in Baltimore who sells mortgage life insurance, recommends to most of his customers that they take out regular life insurance policies, not mortgage life insurance.

"In my opinion, mortgage life insurance fills a need, but it is not the best product to take," he said. State Farm -- unlike insurance companies who offer policies through mortgage lenders or the mail -- does medical screenings.

Stephen I. James, a certified financial planner at Chesapeake Financial Planning and Tax Services, agrees. He bought a house with his wife for $260,000 in which they have little equity. They purchased standard life insurance because it "accomplished the same thing at a more attractive price." A life insurance policy offers the surviving spouse the option to pay off the mortgage or invest the policy amount and pay the mortgage from interest.

Homeowners in their 40s or 50s, with substantial equity in their home, probably do not need the insurance at all, he said. If the husband died, and the children have left home, the wife would sell the home, pay off the mortgage, and move to a smaller house.

Mortgage life insurance -- which usually requires less medical screening and is mass marketed with premiums based on age -- does make sense when homeowners can't get life insurance because of health problems, say planners and agents. In that case, mortgage life insurance may be the best option available. That higher medical risk may be why sometimes it is a little pricier, said Debbie R. Chase of the American Council on Life Insurance.

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