As Financial Planners in Cornwall, one area we can add a great deal of value for clients is managing risk, especially as it relates to Life Insurance and estate planning. With Life Insurance, people generally focus on two primary attributes – the premium and the benefit. To understand how to get the best premium you will need to first determine if your need (ie. death benefit) is a temporary need or a need that is permanent (ie. your entire life). This week, we wanted to focus on a temporary need that almost everyone is faced with at some time.
With all the talk about the housing market being so hot lately (at least locally), we thought this week we would look at using life insurance to protect your home. Protecting the mortgage on your family home is very important if you want your family to be able to remain in the home and continue their lifestyle should you pass away.
When it comes to protecting your mortgage, you have a choice. Go the route of a traditional lending institution, or take advantage of a great alternative with term Life Insurance.
Traditional Mortgage Insurance, often sold by banks and credit unions as an amount added onto your regular mortgage payments, is owned by the lender and designed to cover the outstanding balance of the mortgage. The cost of this insurance can sometimes be outrageous when compared to purchasing your own life insurance coverage.
In our experience, some lenders often lead you to believe that this is the only way of protecting your home for your family. We urge you to weigh the pros and cons of mortgage insurance vs life insurance, to see which is right for you before making any decisions as it is important to realize that not all mortgage protection is created equal. The table below shows how Traditional Mortgage Insurance and Term Life Insurance differ.
|Traditional Mortgage Insurance||Term Life Insurance|
|The lender owns the policy and assigns itself as the beneficiary.||Owner & Beneficiary||You own the policy and choose the beneficiary that you want to receive the death benefit.|
|Coverage decreases as your mortgage balance decreases; however, your premium stays the same.||Coverage||Your coverage remains level as your mortgage balance decreases.|
|When you switch mortgage providers, you usually need to reapply for insurance.||Portability||Your policy and protection remain intact even if you switch mortgage lenders.|
|Typically, mortgage insurance rates are not guaranteed.||Guarantees||Your rates are guaranteed for the length of the policy.|
This table illustrates a number of benefits associated with term life insurance. You own the policy, you have control over the policy if you move, you select the beneficiary, and you select the coverage which means you could select a coverage amount that covers other temporary needs at the same time (like income replacement for a surviving spouse). This is very important as it allows your surviving spouse the choice to make their own decision with the death benefit funds you leave, instead of the lender receiving the funds to clear the mortgage balance.
Our experience tells us that most people who purchase mortgage insurance haven’t sat down and determined their real need, and since the death benefit is based on the mortgage amount, it generally decreases over time while the premiums remain constant.
In almost all cases, you will be better protected for a lower cost if you purchase your own life insurance policy rather than adding it to your mortgage payment, assuming you are in good health. Before you sign, please talk to us about a mortgage protection designed to benefit you… not your lender!