Does Mortgage Insurance pay off my House if Something Happens to Me? Maybe
So should I take mortgage insurance through my financial institution or get a personal life insurance policy instead? So what should you do? Mortgage insurance vs life insurance? This should shed a little light on helping you make an informed decision.
If you have a mortgage it makes good sense to insure it. Owning a debt free home is an objective of any sound financial plan. In addition, making sure your mortgage is paid off in the event of your death will benefit your family greatly.
The question is, should you purchase this coverage through your lending institution or from a life insurance company? A good rule of thumb to follow when searching for advice? Ask an expert!
So, while it might be convenient when completing the paper work for your new mortgage to just sign one more form, be aware that it might be a costly decision.
8 Reasons to Purchase your Mortgage coverage from a Life Insurance Advisor
Term life insurance available from a competitive life insurance company is usually cheaper than mortgage life insurance provided through the lender. This is especially true if you qualify for non-smoker rates.
If you have some health issues, the lenders mortgage insurance may not be available to you. This may not be the case with term life insurance where competitive underwriting and substandard insurance are more readily attainable.
Be aware that the death benefit of creditor/mortgage insurance declines as the mortgage is paid down. Meanwhile, the premium paid or cost of the coverage remains the same.
With term life insurance the death benefit does not decline. You decide how much coverage you want to have. This gives you the flexibility to reduce the amount of coverage and premium when the time is right for you. Or keep it should another need arise or in the event you become uninsurable in the future.
Term Life insurance is not tied to the mortgage giving you flexibility to shift it from one property to the next without having to requalify and possibly pay higher rates.
Unlike creditor/mortgage insurance, term life insurance can be for a higher amount than just the mortgage balance so you can protect family income needs and other obligations but pay only one cost-effective premium.
When you pay off your mortgage you will no longer be protected by creditor/mortgage insurance but term life insurance may continue. Also, unlike mortgage insurance, you are able to convert your term life insurance into permanent coverage without a medical.
The beneficiary controls the death benefit
With creditor/mortgage insurance there is no choice in what happens to the money when you die. The proceeds simply retire the balance owing on your mortgage and the policy cancels. In other words, the beneficiary is the financial institution that holds the mortgage.
With term life insurance your beneficiary decides how to use the insurance proceeds. For example, if the mortgage carries a very low interest rate compared to available fixed income yields, it might be preferable to invest the insurance proceeds rather than to immediately pay off the mortgage.
Can your claim be denied?
Often creditor/mortgage insurance coverage is reviewed when a death claim is submitted. Creditor/mortgage insurance allows for the denial of the claim in certain situations even after the coverage has been in effect beyond that 2 year period. Because underwriting on mortgage insurance is done after the claim is made, situations may reveal that you no longer qualify for that mortgage insurance that you’ve been paying into for years.
For those in doubt, I like to refer people to this CBC Marketplace exposé on Mortgage Insurance.
Term life insurance is incontestable after two years except in the event of fraud.
Your bank or mortgage broker can advise you on the best arrangement to fund your mortgage but advice on the most appropriate way to arrange your life insurance is best obtained from a qualified insurance advisor who can implement your life insurance coverage according to your overall requirements.
In many cases, your mortgage will probably represent the single largest debt (and asset) you will acquire. Making sure your mortgage doesn’t outlive you is the most prudent thing you can do for your family.
Contact me if you think it is time to review your current insurance protection or please feel free to use the share button to forward this to someone you think may benefit from this information.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolved from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.