Mortgage Insurance. What You Really Need To Know.
Home ownership is a dream that we all have in common! You have goals in place to save the money required for the down payment on your first property, your dream home. It’s a home that you envision for your future family, to build lasting memories. However, a lack of adequate financial planning could be a stumbling block to attaining these goals. Having an insurance plan in place to cover the mortgage on your dream home is one of the best legacies that anyone could leave for their loved ones.
What type of insurance is required?
Homeowners insurance, also known as “mortgage insurance”, provides coverage for discharging a mortgage in the event of your death. You may be aware that mortgage insurance is a term that typically has been created by the banks. The following sections will assist your understanding of mortgage insurance and how it really works.
What is Mortgage Insurance?
Mortgage insurance offered by banks involves pre-qualification criteria consisting of certain health-related questions. The cost of this insurance is primarily dependent upon your age bracket. An insurance claim can only be submitted after your death. At this point a full underwriting process is launched. The underwriting process is required upon death because it is possible to be declared uninsurable after death and denied coverage even though insurance premiums have been paid. Upon approval of the insurance claim, the beneficiary, i.e. bank or mortgage lender, will pay off the remaining balance of the mortgage. In summary, mortgage insurance provided by banks is essentially group life insurance. The cost is not dependent upon whether you are healthy or not.
Group life Insurance vs Personally Owned Life Insurance
a) Group Life Insurance Provided by Banks for Mortgages
The balance of the mortgage will determine the amount of life insurance that will be required, and the cost will be driven by your age. At the five-year mortgage renewal period clients must re-qualify by completing a health questionnaire. The insurance premium will not change but the coverage will be decreased. The lender or bank is the beneficiary and the proceeds can only be used to pay off the mortgage. When the mortgage is paid off, defaulted, or assumed, the insurance coverage will also be terminated.
b) Personally Owned Life Insurance Policy
This type of coverage allows you to have complete control of your policy. In this case you can select an option that meets your needs by choosing between a level coverage or a decreasing coverage. You will have the ability to choose your own beneficiaries and coverage remains in place if the premiums are paid. There is no need to reapply should you decide to change mortgage lenders. This type of policy is not restricted to the mortgage and the proceeds of any claim can be used at your discretion. The amount of premium is contingent upon a healthy lifestyle. After the mortgage has been settled the policy can remain in place.
You are in complete control of your policy. You get to select the amount of coverage you wish to apply for. You have the ability to choose between a level coverage and a decreasing coverage. You can select the beneficiaries of your policy and as long as your premiums are paid, you have coverage. If you change mortgage lenders, you need not to reapply. You can use the proceeds of your claim to cover whatever you like; it is not restricted to the mortgage. Your cost of insurance is dependent upon your health only. The healthier you are, the cheaper your premiums. Once your mortgage is paid off, you have the ability to keep your coverage.
Please see the infographic below for a summary of the differences. The infographic at the end of the document will summarize the differences.
Infographic highlighting the differences between personally owned life insurance compared to life insurance offered by the lender (banks).
Conclusion
When comparing the above options, it should be evident that a personally owned life insurance policy can provide greater value. A life insurance policy is a wise investment to undertake for the protection of your mortgage, even if you have access to liquid assets. If you do have access to cash, you may also consider a discussion about investment strategies with a financial professional. A mortgage is one of the largest debts that you will incur and until it is paid in full your property, dream home etc., technically is owned by the bank or mortgage lender. Life insurance is a means of ensuring that your property is protected for the benefit of your future generations.
Between both options of life insurance discussed, you will have greater value with owning your life insurance policy. Having a life insurance policy in place to cover the balance of your mortgage is a wise investment, even if you happen to have liquid cash laying around too. And if you happen to have that liquid cash laying around, let’s talk investment strategies. Your mortgage is one of the largest debts you’ll ever have and until the loan is paid off, your property is technically owned by the bank. If you have any desire to keep the property in your family, then having life insurance is a must. Remember; the borrower is always a servant to the lender; so put yourself and your family in a position that settles your debt from your lender.