Choosing the Right Insurance Package

When you buy a house, the mortgage company wants to make sure it won’t be hurt too badly if you skip town without paying off the loan. Unless you can put down at least 20% of the home’s value, you’re usually required to get PMI. The policy’s purpose is mainly to secure the lender’s investment, but people are using it to buy a home with a much smaller down payment. More are opting for PMI after a rash of stories about adjustable-rate loans ballooning into unmanageable payments: Applications were up 56% from February to March 2007, according to industry trade group Mortgage Insurance Companies of America. Eleven percent of new loans included PMI in the first quarter of the year, a number that’s expected to rise. But you’ll pay for it in the long run. Premiums can amount to as much as a 13th mortgage payment each year.

According to some statisticians, you could fly on a major airline every day for 26,000 years before you’d be involved in a plane crash. Even then, the odds are that you’d survive the crash. Besides, you may already have flight insurance, if you purchased your plane ticket with a credit card. If you don’t hold onto them long enough, cash-value life insurance policies are a waste of money. Cash-value life insurance theoretically offers both a death benefit (the money paid to your heirs when you die) and a return on investment. Your equity in the policy — the cash value — builds up over the years, and you can borrow against it or simply stop paying on a policy and let the annual dividends keep the policy in force. While your survivors will still get the death benefit, these policies cost you big chunks of money in the first few years. According to a study by the Consumer Federation of America, it takes five years before one of these policies shows a positive return. And even then, that return is extremely small. Even after 10 years, the average return is only about 2%. All of this is due to brokers’ commissions and other fees paid in the beginning of the policy’s life.

It’s more expensive than it’s worth. Besides, you could do better with another policy — one that you might already have. These policies are designed to make your mortgage payments if you die or become disabled. If you’re worried about burdening your heirs with mortgage payments, you’d be better off buying straight life insurance. Adding on to your existing life insurance policy is less expensive than mortgage life. There will be arguments a-plenty here. Often, this coverage is offered to those who leave one job for another. Under the federal COBRA law, your old insurance policy can “follow” you for about 18 months after you leave, but you have to pay the whole premium. (Here’s where you find out just how much your employer’s been kicking in for your insurance coverage.) You don’t have to pay the premiums until 100 days after your last day on the payroll but let’s say you’re single, run three miles a day, don’t smoke and are terrifically healthy. You may decide that the cost of COBRA coverage is too high for the low risk of developing a medical problem before you take your next job.

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