Pros & Cons of Disaster Mortgage Insurance

Woman Reading on Tablet - Disaster Mortgage Insurance Pros and Cons
(Last Updated On: September 21, 2021)

Disaster Mortgage Insurance. Sounds important. But if your member has a mortgage, they already have homeowners insurance; it’s required. So who cares?

Why consider another layer of protection? Wouldn’t the benefits be included in a typical homeowner’s policy if it really mattered? And most importantly, if a member wanted it, would it be worth their money?

In the previous article, we introduced you to Disaster Mortgage Insurance. You learned how tragedies can strike anywhere and leave a family up a figurative or literal creek…without a paddle. In other words, bad stuff can happen, and often isn’t covered by traditional insurance.

We shared the potential for disasters, including data on events and losses. Then you saw how this can put your own portfolio at risk, along with upending members’ lives. Since we’re all here to build financial empowerment, strategies to avoid that are welcome.

Plus, there’s opportunity to build both loyalty and ancillary income. We believe revenues should come from value-adds rather than punishment fees, and disaster mortgage insurance might be one of those valuable opportunities.

This article will look at the Pros & Cons (jump straight to that analysis) of disaster mortgage insurance so you can best evaluate if it’s worth discussing at your credit union.

By the end, we hope you’ll have sufficient information to understand what it can offer and if it might be a fit for your members.

What makes up Disaster Mortgage Insurance?

Disaster Mortgage Insurance Comparison Chart
Does your homeowners insurance cover that? Probably not. Credit: First Service Group

There are 3 standard and 2 optional benefits included with a typical Disaster Mortgage Insurance policy. Let’s do a quick review of each so we can then consider the Pros & Cons. If you want more details, refer to our intro article on Disaster Mortgage Insurance.

We’ll be using the exact descriptions from one provider to keep consistency among benefits.

Mortgage Payment Protection

Surreal Living Room Flooding
This is fine. Just a bit damp.

Does your credit union offer Payment Protection for Life or Disability? Mortgage Payment Protection is similar:

This benefit ensures the expense of your monthly mortgage payment is covered against perils that can damage and displace you from your home including fire, flood, windstorms, radiation, earthquakes, mudslides, volcano eruptions, and gas leakage.

If one of these losses renders your home temporarily uninhabitable (for 48 hours or more), the Mortgage Payment Protection benefit pays your monthly mortgage payment for up to two full years while your home is being repaired or rebuilt.

What does that mean?

Most homeowners policies will typically exclude coverage for flood, radiation, earthquakes, sinkholes, windstorms, and mudslides. Increasingly, perils like flooding may be covered under separate policies (>50% of people don’t realize this).

And when have you ever heard of a policy covering your monthly mortgage? Never, that’s when. According to Business Insider, the median monthly cost of a mortgage in the U.S. is $1,556. That’s a potential average benefit of $37,344 over two years.

Mortgage Balance Payoff

Cracked Bricks
When the damage is too great, you’re not burdened by the costs.

Think of this benefit as similar to GAP coverage for cars deemed a total loss:

If your home cannot be made fit to live in by repair, restoration or reconstruction due to condemnation, or movement of the land on which your property exists, the Mortgage Balance Payoff benefit pays off your remaining mortgage balance after proceeds are paid by your homeowners policy. This benefit is not applicable to mobile homes.

What does that mean?

Imagine a scenario where your member lost their home, possibly even the land where it resided. It’s one thing to rebuild, another entirely when that’s just not possible. Now imagine being responsible for the balance of that mortgage not covered by their insurance settlement.

Their homeowners insurance comes up with a value, less policy deductibles, based on their “full amount” up to maximums. Depending on if they have ACV (Actual Cash Value) or Replacement Cost coverage can mean large variation in that number.

If it happens to be less than their current mortgage balance, this benefit pays the difference. No one wants to owe money on a home that doesn’t exist.

Reimbursement of Homeowner’s Policy Deductible

Raise your hand if you love paying a deductible. Anyone? Unfortunately, in a world of shared-risk, they’re a mechanism for offering a range of rates. However, there’s still reason to get that hand up:

The Reimbursement of Homeowners Policy Deductible benefit will reimburse you the deductible you incur on any dwelling claim paid from your homeowners policy. This benefit provides for reimbursement not once but twice in a 12-month period in the event you suffer more than one loss in the same year. In most states, you have the flexibility to select either a $500 or a $1,000 benefit to best align with your homeowners policy deductible amount.

What does that mean?

With insurance, it’s usually an exercise in parsing the narrow definitions of coverage. In other words, figuring out what’s actually covered. Not so with this benefit. Any dwelling claim filed and approved by your homeowners insurance is covered, even if it isn’t from a disaster.

And you can use the benefit twice in a year. Not that you want to deal with two insurance claims in 12 months, but it’s good to know the deductible costs are covered.

There’s also an interesting side-perk this can deliver for your members. They don’t need to select a $500 deductible on their policy if this program is set to cover $1000. It allows them to reduce their homeowners insurance premium.

Maybe they’ll find savings enough to offset the costs of this insurance!

Mortgage Payment Protection for Involuntary Job Loss (Optional)

Wallet with Cash and Credit Card
Cash flow for when your cash flow stops.

Stuff happens. Sometimes, that stuff is a big deal. Recessions, pandemics, or even more local events that totally disrupt an economy. Perhaps a major company exits a town, a local factory shuts down, or a tornado damages large workplaces.

This gets even more “hyperlocal”. The “stuff happens” could be in your own company, which decides to reduce costs by cutting back on jobs. Being amongst those layoffs is devastating financially.

Involuntary Unemployment can come from many places. Why should your members suffer due to reasons outside their control? And would they be able to keep current on their mortgage payments until they find a new job? If only there were some benefit to help:

The Mortgage Payment Protection for Involuntary Job Loss pays your monthly mortgage payment, or a portion thereof, if you and/or your co-borrower (when joint coverage is selected) become involuntarily unemployed.

In the event you or your co-borrower (when joint coverage is selected) experience a covered loss of unemployment, this benefit will pay the monthly benefit amount for the number of months reflected within the plan you select at time of purchase.

What does that mean?

Most people think first of keeping food in the refrigerator, and on the table. Then priorities move to utilities and their car payment. These are essentials, no doubt. But all pale in comparison to losing a home.

Granted, the process for defaulting on a mortgage and going into foreclosure takes time. So it could be thought of as less important. However, consider the credit impacts this could have, and the long tail that can have on life. Even after employment is found, the scars remain.

And when you’re already behind, starting up again in the red just makes financial security more difficult to achieve. As their financial partner, your credit union has every interest in helping them find stability and success.

“What about Federal aid or state benefits?” Great question, and one we just cannot answer. More than likely, if any assistance arrives, it will take some time and be less than expected. With this protection, coverage begins after a 30-day qualification period.

(Payments are retroactive back to their first day of Involuntary Unemployment)

Since this is an optional benefit, your institution or member decides on the term (2-6 months) and if they even want the coverage. We believe that risk should be evaluated against savings and anticipated timeframe to re-employment.

This is a conversation best had with a trusted financial counselor.

Emergency Cash for Disasters (Optional)

Lifesaver on Wood
Catch some needed cash and breathe easier.

When disaster strikes, your first thought goes to the safety of loved ones and your immediate community. From there, you probably look to an emergency savings to sustain until assistance or other relief arrives.

What about the millions of Americans with no emergency savings? Only 39% of Americans can afford a $1000 emergency expense. If you’re displaced from your home without an emergency fund, things get far more difficult and dire. Here’s a benefit to help:

Emergency Cash puts extra money in your pocket to further assist with the additional expenses you may incur as a result of being displaced from your home as a result of a covered loss. This coverage is offered at a $500 or $1,000 benefit amount. The funds will be mailed to you within 24 hours, to allow for your immediate use in paying for supplies, living expenses, or anything else you may need as a result of being displaced from your home.

What does that mean?

Put simply (and not lawyer-evaluated): If you can’t live in your home, you get cash fast to help ease the burden. Whatever you need to buy, the funds are now available. It’s a peace-of-mind benefit.

Since it’s both optional and in two amounts, we suggest discussing with a member to determine the need level and desired protection.

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Pros of Disaster Mortgage Insurance

Baby Holding Finger
It’s about protection.

When disaster strikes, whether a natural disaster, house fire, or burst pipes, people quickly discover the limitations of their homeowners insurance. In these suddenly difficult times, financial security can be put at risk. Protecting family and livelihood must come first.

For your institution, ensuring low portfolio risk is an ongoing goal. But so is creating opportunities for financial empowerment. Does Disaster Mortgage Insurance achieve these goals? It can.

Let’s make the Pros of Disaster Mortgage Insurance simple with two lists, one for the institution and the other for the mortgage-holder:

Institution Pros of Disaster Mortgage Insurance

  • Helps your financial institution keep a mortgage out of delinquency after it suffers damage of some sort
    • Payment of the mortgage even when the member cannot may reduce write-offs
  • Serves your credit union mission of people helping people, especially in their most difficult moments
  • Adds a marketing differentiator for your mortgage program, potentially driving business and/or member loyalty

Member Pros of Disaster Mortgage Insurance

  • Protection against scenarios not covered by traditional homeowners insurance policies
  • Helps policyholders continue paying their mortgage during challenging times
  • Ensures the homeowner (and their family) have money to live somewhere while their home gets repaired
  • Provides fast funding after an event, potentially preventing members from taking out high interest-rate personal loans
  • Extends the idea of household protection beyond the physical property, into their career
  • May be “paid for” though homeowners insurance policy savings from increased deductibles

Cons of Disaster Mortgage Insurance

Rubik's Cube in Sand
Challenge accepted.

Such a protection product has to come with some downsides. From our research, we couldn’t find too many, but we wanted to share what we felt were the largest challenges. Take these into consideration when deciding if Disaster Mortgage Insurance is right for your institution:

  • Creates an additional expense, raising your estimated monthly mortgage payments compared to “competitors”
  • Lack of awareness and understanding in the market means both your staff and members need to be educated
    • During a mortgage process already filled with questions, this may be one too many for an overwhelmed member
  • Comprehensive staff training necessary to explain and offer properly (and within regulatory frameworks)
    • May face challenges in convincing your mortgage team that it is a net-benefit for the institution and members
  • Your institution’s website and mortgage materials will need updating with approved language to introduce the insurance product
  • Must dedicate resources to regular marketing, as the additional cost must be understood to be a massive benefit to members

Cost

Coin Stacks with Wooden Home Model
Which tier is right for your credit union and members?

We’ve spent a while discussing what’s included in Disaster Mortgage Insurance and the Pros & Cons for both your members and credit union. So what’s this product cost? It…depends.

Pricing varies by state and region. It also depends on the monthly mortgage payment, deductible, and optional benefits (if any) chosen.

Using our example provider, your credit union would be able to customize some of the benefits. In essence, you could make member choice simpler with fewer options, or let them decide what’s best for their needs.

Assuming your credit union wants to share all coverage permutations, a member would be provided with 3 offers:

  • Basic Plan (No options)
  • Comprehensive Plan (Includes the 2 optional benefits)
  • Build Your Own Plan (Members customize benefits and coverage amounts, where applicable)

Average Pricing

Let’s take our area as an example. We have radically expensive homeowners insurance policies here in South Florida (highest average premium in the country), so in some ways, this is an “extreme” scenario. Your own members may see an even better rate.

Estimates based on the following:

  • Home is located in the Florida ZIP code of 33325
  • $250,000 mortgage with a $1500 monthly payment

Basic Plan

Includes $1000 homeowners policy deductible reimbursement

  • Monthly cost: $17.25

Comprehensive Plan

Includes all Basic benefits, plus $1500 Involuntary Unemployment (Single borrower) for 2 months & $1000 Emergency Cash

  • Monthly cost: $32.75

In our storm and seawater rise-addled area, the costs seem reasonable, but will it get used? Sources claim that homeowners insurance claims are filed, on average, once every 10 years. However, about 5.7% of insured homeowners filed a claim in 2018.

We look at it a bit like your auto loan protection products. Not every member will use what they’ve purchased, but your institution decided they were important enough to offer. Take the same approach for homeowner protection.

Stick with us for one final point you can include in your Pros & Cons analysis.

Is Disaster Mortgage Insurance a Replacement for Homeowners Insurance?

Red Question Mark With Others
A question your members will ask. Have the answer ready.

No.

Seriously, that’s it. That’s the final point. Even if you offer this to your members, they still must retain a homeowners insurance policy appropriate for their dwelling.

Should Your Institution Offer Disaster Mortgage Insurance?

Of course, this is a question we cannot answer for you. In our opinion, additional protection for members, and one which boosts financial empowerment, is a great thing to consider.

Personally, I’ve had homeowners insurance claims and just the deductible reimbursement would have paid off the cost of this product for a number of years. So for me, yes, it’s something I’d want my financial institution to offer.

If your members live in disaster-prone areas (which, due to climate change-driven extreme weather, is a larger area than ever), this type of coverage can provide additional assurance and protection.

The mortgage market, like auto lending, is competitive. Your institution is always looking for a way to stand out. Waiving closing costs or providing a better rate is good, but having something legitimately unique would probably give your marketing team reason to cheer.

Homes & Cars & Tech, Oh My!

The Learning Library covers a wide range of topics. We hope this article helped you better understand the Pros & Cons of Disaster Mortgage Insurance. There are other pieces on Direct Insurance products, as well as the original intro to this coverage.

Our favorite areas to discuss are auto lending and digital transformation. Their overlap continues to grow, as you see with fintechs and the need to provide seamless online services.

We look forward to sharing innovative content that bridges these gaps. While setting your credit union up for success in a digital and mobile-first world. Be sure to Subscribe to the Learning Library so you don’t miss a single thing!

Until next time, keep it honest!

Joe Winn - CU Geek

Blogger. Speaker. Part-time Jedi.

Focused on helping your bank or credit union grow in the face of emerging challenges.