When taking out a mortgage, homeowners should take a look at the different methods of insuring that mortgage. A home is one of our largest and usually a primary financial asset, so having that mortgage covered in case something dire happens is simply smart. Knowing what to look for can help you get some peace of mind.
Death Benefit Coverage
If you look at the death benefit coverage purveyed with mortgage insurance, note that as your balance on that mortgage decreases, so does the amount on that coverage. Mortgage insurance pays the balance of your mortgage upon your death. If you started out with a $300,000 mortgage, by the time the home is halfway paid off, the benefit would only be roughly $150,000. In this case there are no extra funds left over.
Looking at a term life insurance policy puts things in a different light. If you take out a policy of $300,000 with the same type of death benefit, that insurance would be worth that $300,000 no matter how long it was held. There would be enough to pay off the mortgage with the rest going to beneficiaries. This separate policy allows you to name a beneficiary to carry out your wishes.
To get the best policy at the best price it pays to shop around. Sometimes it is hard to compare mortgage insurance with a term life policy, largely because of the legalese. But there are a few things to look for. First, if you are considering mortgage insurance, know that the amount of your monthly payment stays the same, no matter how much the insurance benefit decreases each year.
Term insurance premiums also stay the same, for the term that you have agreed to. Most common is a ten-year term, with premiums staying the same for those ten years. Then, when, or if, you renew, the premiums increased for the second decade. Many agents advise a 20-year term since that would cover most if not all of your mortgage term. If you needed to renew after that, you could reduce the death payment benefit, thus reducing your premium costs.
People who are healthy usually find that it is less expensive and more beneficial to buy the term life insurance. Smokers or those with other health problems often find the mortgage insurance route to be the wiser, and cheaper, way to go.
Personal life insurance policies require a medical exam before being processed and approved. The underwriting is done at the time of that approval. Mortgage insurance, on the other hand requires no exam, but banks do have an extended questionnaire that needs to be completed. This form can be confusing and if there is an error it may delay or even deny your claim down the road.
This denial of claim has happened. Because of errors on the application form, two clients were declined a payout even though they had put money into premiums every month. The problem is that the underwriting is done, at least partially, at the time of the claim. Bottom line, with mortgage insurance, you may or may not be covered.
Flexibility of Term Life Insurance
Mortgage insurance, offered by the bank, is only good on one specific mortgage, with that one bank. If you move the mortgage elsewhere, that policy does not move with it. Most likely you will have to go through the qualifying process again with your new lender.
Personal life insurance is more flexible. The policy is independent of any mortgage and belongs to you. You can change mortgages, change the policy terms, or do other changes that you deem necessary.
Think of mortgage insurance as one policy, one offering, for every single client. Personal life insurance can be tailored to the individual client and is more user-friendly. Keep this in mind as you do your homework before investing in protection for your dream home.