Is mortgage insurance the right choice

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Is mortgage insurance the right choice

You have decided to purchase your first house or you are re financing your mortgage. Financial institutions will usually offer you mortgage insurance when selling you the mortgage. Mortgage insurance ensures that in the event of your death your mortgage will be paid off. Sounds great right – what is left owing on your house is paid and your partner will not have to worry about a mortgage. However, there are drawbacks with the product; a personally owned life insurance policy can be a better fit for your needs. Here are some key points to think about before signing up for the banks mortgage insurance.

Ownership

Mortgage insurance is owned by the bank and they are the beneficiary.  This means that you have no control over the policy and if there is a payout, the bank receives the funds. While this would pay off our mortgage, it does not leave your family with any funds. With a personally owned life insurance product, you own the product and you can name the beneficiary. If there is a payout, your beneficiary receives the funds and can decide what to do with them.

Coverage Amount

Mortgage insurance is tied to the value of your mortgage and will only pay out the balance owing. Your rates stay the same as your coverage amount decreases. This means that as time moves forward, your cost per $1000 of coverage is increasing. With personally owned life insurance, your coverage amount is not tied to the mortgage value so it remains constant for the duration of the policy. Your rates stay the same for the period selected, meaning your cost per $1000 of coverage stays the same. The bonus is that generally speaking, the cost of personally owned life insurance is less than mortgage insurance. Also, if you purchase $400,000 of life insurance and your mortgage has decreased to $200,000 at time of death, your beneficiaries receive the full $400,000, at which point they can choose to pay off the mortgage and have $200,000 tax-free in their pocket for whatever else is needed.

Guarantees

Mortgage insurance has no guarantees built into it, meaning that the rate you pay now may increase in the future. Also, each time you refinance your mortgage, you have to re-apply for mortgage insurance. If your health changes when re-applying, you may not qualify for the insurance when you refinance your mortgage. With personally life insurance, your rates are contractually guaranteed and therefore cannot change; the policy is also guaranteed to renew, regardless of your health and will stay in force as long as you continue to pay the premium.

Underwriting

Financial institutions do all their underwriting for mortgage insurance at the time of a claim. Meaning if you submit a claim, there could be months before a payout could happen. Secondly, if there is a discrepancy at the time of claim in terms of your current health and what you stated on the form, there may not be a payout at all. Personal life insurance does all of the medical underwriting at the time of application. Once you are approved any changes in your health will not affect the payout. As long as you are truthful in all your answers and do not omit any health concerns when completing the application, the policy will pay out some time in as little as two weeks.

The last thing to consider is with mortgage insurance, the people selling it are generally not life insurance agents by trade; they are mortgage brokers and not subject matter experts on life insurance products. By comparison, when you purchase personally owned life insurance, you are working with a life insurance agent who will walk you through the full application process and do their best to make sure that you fully understand the benefits and costs associated with each product. Properly protect yourself and get the coverage that will provide security when you need it the most. 

Talk to your financial advisor. Get in touch.

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