HOW MORTGAGE PROTECTION ASSURANCE WORKS
A mortgage protection assurance contract is between the life insurer and the lender. The life insurer promises to pay to the lender the expected outstanding loan if the borrower dies during the loan repayment period. The lender pays the premium to the insurer, though the borrower bears the cost of the insurance. Lenders can arrange it on individual borrowers or as a group mortgage assurance.
The life policy covers the life of the borrower for the risk of dying prematurely during the loan repayment period. The period can range between five to 20 years, depending on the loan agreement.
Mortgage loans are repayable in instalment over the loan repayment period. Thus, the principal reduces with each instalment payment. The sum assured also reduces as the principal. On premature death of the borrower, the life insurer is liable to repay the expected outstanding principal, normally attached as a schedule to the policy. A mortgage protection assurance is thus a Decreasing Term Assurance and the life insurer considers the decreasing nature of its liability to calculate the premium.
The following is an example of a GhC500,000 mortgage loan repayable over 20 years with annual principal repayment of GhC25,000.
Year Principal Sum Assured
1 500,000 500,000
2 475,000 475,000
3 450,000 450,000
4 425,000 425,000
. . .
. . .
20 25,000 25,000
If the borrower dies in year 4, the life insurer pays GhC425,000 to the lender.
MORTGAGE PROTECTION ASSURANCE PREMIUM
A decreasing term assurance is a protection only contract that pays the lender if the borrower dies during the loan repayment period. The life insurer charges the cost of the risk of premature death, and a loading for expenses to cover things like commission, medical examination and management expenses. Since mortality cost is the main factor, the premium is relatively low compared with other types of life policies.
There are two premium payment options: single premium or level premium payable annually. For a single premium the policyholder pays a lump sum at the beginning of the contract to cover the loan repayment period. It is actually a discounted value of the level annual premium.
The level premium is payable annually at the beginning of each policy year. Readers may expect that the premium will also be reducing as the sum assured on a mortgage protection assurance policy reduces. The life insurer takes the reducing nature into account by collecting the level premium over a shorter period than the loan repayment period. For example, if the loan is repayable over a 20-year period, the life insurer may collect the level premium for 15 years, five years shorter than the policy duration.
If the contract is a group contract with a register of members, the lender pays the premium on all the borrowers in the register at the beginning of each policy year. When a borrower completes their instalment payment or dies, the life office removes the name from the register.
Profile of Amos Adeoye Falade
Mr Falade is a 1980 graduate of the University of Ibadan. He holds a Bachelor of Science, Second Class Honours (Upper Division) Degree in Economics (1980) and Master of Communication Arts Degree (2002) from Ibadan. He is an Associate, Chartered Insurance Institute, London (ACII) 1985 and Associate, Chartered Institute of Stockbrokers (ACS) 2010. He also holds the Authorized Dealing Clerk’s Certificate of The Nigerian Stock Exchange (2011). He is a Member, Equipment Leasing Association of Nigeria (ELAN); Member, Institute of Financial Planners. He is also a Fellow of the West African Insurance Institute.
He specialized in Life Insurance and Pension in his insurance career that commenced in 1975. He attended several courses on life insurance including Actuarial Aspects of Life Insurance by Swiss Re/West African Insurance Institute, Monrovia, Liberia (1984) and India’s National Insurance Academy (1997).
He taught several generations of student life insurance and pension preparatory for the professional examinations of the Chartered Insurance Institute, London from 1987, and Chartered Insurance Institute of Nigeria from 1989. Since 2002, he has taught Pension
Planning & Administration and Life Insurance at the West African Insurance Institute, Banjul, The Gambia where he is a Visiting Lecturer. He is also a resource person for the Association of Investment and Portfolio Managers.
He held top management positions in the financial services industry. He was Head of Pension in Niger Insurance (1982 to 1988); General Manager (Life and Pensions), Nigerian French Insurance Company Limited (1988 – 2003); General Manager/Chief Executive Officer, Guardian Express Assurance Limited (2003 – 2008) where he retired. He was Managing Director/Authorised Dealing Clerk, Golden Capital Plc (2011 – 2014). He is currently a Stockbroker/Dealer on The Nigerian Stock Exchange.
He held several positions in the insurance industry before retiring in 2008. He was Chairman, Life Offices Committee (2003 – 2006) and a Member of the Governing Council of the Nigerian Insurers Association (2007 – 2008). He represented the Association in many national assignments including the Securities and Exchange Commission’s Committee on Pension (2001/2002), and Central Bank of Nigeria’s Financial Systems Strategy (FSS 2020).
Mr Falade is a writer. He has written many articles on life insurance and pensions published in local and international professional journals. His four books on
Life Insurance and Life Annuity are in the process of publication.