Another great article of the Hespeler Village Magazine came out in September and again, Davlyn was happy to spend the time to help educate and engage with the great people in our community. This article was all about the age old question: mortgage or life insurance. We’ll help you decide:
Is Mortgage Insurance Right for You?
I remember that feeling all too well. That uncomfortable, noxious feeling. Sitting in the chair at my bank, as I waited to get approved for my first mortgage. It was painful. Then I was elated and a little lightheaded when I found out that I was approved! Just then, the banker said “…and of course you want mortgage insurance, right?” I was so happy that I was approved. I immediately said “Yes,” not really knowing what I signed up for. Unfortunately, a lot of people don’t understand mortgage insurance.
If something happens to you, the mortgage is paid and therefore, your family won’t be out on the street. With mortgage insurance, the premiums are usually tacked on to your mortgage, “so you don’t even notice them.” But instead, you can buy term life insurance. Either way, your mortgage is paid off if you die.
THE FACTS: Mortgage insurance and term life insurance are similar in many ways. However, there are some key differenced between them:
- Cost: Premiums (the cost of the policy) stay the same for the term, for example five years, but the death benefit (if there is one paid out during that time) decreases. So in English, you get less for your money over time. This is much worse than term insurance in which the death benefit never reduced, unless you instruct your insurer otherwise.
- Convenience: Insurance through your lender (bank, credit union, etc.) can usually be arranged more quickly and often it’s done when you sign for your mortgage. Life insurance requires more time and effort up front. However, underwriting for mortgage insurance is done after you’re dead. It’s kinda hard to argue the facts then. Life insurance is underwritten up front, so there are no issues on death.
- Portability: Mortgage insurance is not portable. Should you switch lenders when your term is up, or buy a new home, you will need to apply for a new mortgage insurance policy. Keep in mind you will be older, and perhaps in poorer health. Life insurance, on the other hand, stays with you since you own it.
- Beneficiary: This is best illustrated with an example: with a $300,000 policy with only $20,000 mortgage value the bank is the beneficiary of the mortgage insurance. Yup, the bank pockets the money. Sure, you don’t have a mortgage, but the bank is far better off in the situation. Now, the same scenario with life insurance: the entire $300,000 would be paid to your named beneficiaries tax-free and they can choose to pay the $20,000 mortgage out and still have $280,000 tax free left over.
In summary, while mortgage insurance is easier to get, it is more expensive and it’s not portable. You neither own it, nor can you name a beneficiary. On balance, it makes sense for most people to get their own insurance policy.
Do you have questions about your life insurance? Or do you have an idea for a future article? Contact me at email@example.com.
David Reeve is a local investment advisor and president of Davlyn Financial.