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Mortgage Protection Life Insurance Regulations

Early Payment Penalties on Your Mortgage

Many mortgages can be paid off early without penalty. Unfortunately, there are some mortgages that have penalties imposed if they are paid off before the loan is up. Some of the penalties are a flat penalty regardless of how close you are to the date of the mortgage ending. Others have a sliding scale that imposes a harsher penalty in year two than in year 10 or 15, and some only charge the penalty the first few years of the loan.

It is important to understand whether your loan company will make an exception and not charge the penalty if the mortgage is paid off after the death of one of the borrowers. If they will not make an exception in this case, then you may want to add more death benefit to your mortgage protection life insurance to cover this fee. Mortgage Protection Life Insurance has a level or decreasing death benefit and will not pay for any costs or fees above the stated death benefit.

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Mortgage Protection Life Insurance Within a Trust

If you have created an irrevocable or revocable trust to make handling your estate easier, you can name that trust as the beneficiary of your Mortgage Protection Life Insurance policy. As long as the underwriters of your Mortgage Protection Life Insurance policy can see the insurable interest that the trust named has in your life, there is no rule against naming a trust as beneficiary of the Mortgage Protection Life Insurance proceeds.

You can also make the trust the owner of your policy. When this is done, the trustee will be the only person authorized to make changes to the trust. When a revocable trust is made owner of a Mortgage Protection Life Insurance policy, the trustee can name another owner and remove the asset from the trust. If an irrevocable trust is named as owner, the asset (the Mortgage Protection Life Insurance policy) cannot be removed from the trust, as assets are given to the trust irrevocably.

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How Insurance Company Reserves Work

It can be difficult to comprehend how an insurance company can pay out such large death benefits with such small premiums. The beneficiaries of a person with a $500 annual premium and a $200,000 Mortgage Protection Life Insurance policy can be awarded the death benefit after as little as one premium payment (as long as there was no material misrepresentation on the application and the death was not a result of one of the excluded causes).

Each state requires that insurance companies take a portion of the premium payments they receive and set them aside into reserve pools. The amount of money the insurance company must set aside is determined by the amount of death benefit they can expect to pay out based on prior years. So even if you have only paid a very small premium amount toward your death benefit, you can rest assured that your insurance company has a pool of funds to pull from in order to pay your Mortgage Protection Life Insurance death benefit.

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Explaining a Policy Lapse

In order to keep a Mortgage Protection Life Insurance policy in force, you must make your premium payments by the end of your policy’s grace period. Generally, a grace period ends thirty days after the original premium due date.

When your premiums are not paid in time, your policy will no longer be valid. This is referred to as a policy lapse. Should your Mortgage Protection Life Insurance policy lapse, even due to an innocent oversight, your beneficiaries will not be awarded any portion of the death benefit your policy promises. Since the Mortgage Protection Life Insurance policy contract between you, your beneficiaries, and the life insurance company requires a timely premium payment from you, the contract is considered void once you stop paying your premiums. Any additional benefits from riders like the accelerated death benefit or return of premium riders will also be null and void after a policy lapse.

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Getting a Policy Reinstatement after a Lapse

If you do not make a Mortgage Protection Life Insurance premium payment by the end of the premium grace period, your policy will lapse and your beneficiaries will no longer be entitled to any of the benefits your policy afforded. When this happens, you can get a new policy with increased rates for any health problems or increase in age you have had since you took out the original policy, or you can ask that your lapsed policy be reinstated.

In order to reinstate the policy, the underwriters of your Mortgage Protection Life Insurance policy will ask you to complete a reinstatement application. Because they want to evaluate your health before they reinstate your policy, the application for reinstatement of your Mortgage Protection Life Insurance policy will have many health questions. You will be asked to send the completed application in along with the past due premiums and a penalty. If the application is approved, your policy will be reinstated with no changes to your premium.

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