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Insuring Your Most Valued Possession
"Having completed the Certified Financial Planning program, I thought
it might be useful for my clients to have additional information
on the benefits of life insuring their mortgage loan. This discussion
will compare two basic term life insurance options, along with
the pros & cons of each.
The subject of life insurance has never been "glamorous". Contemplation
of one's own mortality is a topic we'd rather avoid. I strongly
believe that one needs to invest in protecting one's family and
their family's greatest investment - their home.
As a very general rule of thumb, at a "bare bones" minimum, one
should carry term life insurance coverage in excess of one's debt
load. The largest component of that debt load is one's mortgage
loan. Hence, if your mortgage balance is $150,000, the face value
of your life insurance should be at least that dollar amount.
On a side note, unrelated to mortgage life insurance, a quick
rule of thumb used by many financial planners is that if you have
dependent children, you should carry life insurance coverage in
an amount equal to 10 times your income (sounds like a large amount!).
One has to consider providing for raising a family and the future
educational requirements of one's children.
There are other types of life insurance on the market including
whole life and variable type policies. I personally believe in
unexciting basic term life insurance, so this discussion will
not elaborate on the other products available.
BANK INSURANCE1
Your bank / financial institution where you are arranging your
financing offers their own "in-house" life insurance coverage,
usually through a major 3rd party life insurance company or their
own related subsidiary.
The attraction of arranging the insurance directly with your personal
banking representative is: convenience. One document to sign.
Automatic approval for healthy applicants with mortgage loan values
below a certain threshold limit. The premiums are also automatically
added to your mortgage payment. The premiums tend to stay the
same over the entire life of the mortgage. Wow! This sounds great,
but at what cost?
First, the main disadvantage is cost. It tends to be (but not
always is) more expensive. You pay for the convenience. Second,
is a lack of flexibility - the beneficiary is the bank. Third,
the payout amount (face value) of your policy decreases as you
pay down your mortgage. What if you are accelerating the pay down
of your mortgage? What if you make lump sum bulk payments against
the principal amount owing? Are you getting the best "bang for
the buck"? You are paying the same premium while the face value
of your policy declines.
Of course, the question begs: what if I refinance my mortgage
loan or "port" my existing mortgage over to a newly purchased
home? What if you switch lending institutions and move over to
a different bank? What would happen if you had future financial
difficulties and your monthly combined mortgage / insurance amount
was in arrears? The most important question is, what would happen
if your health changed down the road and you needed to reapply
for increased coverage?
INDEPENDENT LIFE INSURANCE POLICY1
I believe the better option is to arrange for your own independent
guaranteed term life insurance policy through an underwriter unrelated
to your lending institution. Although the application / approval
process is lengthier, your options are greatly improved. Your
monthly premium will be guaranteed for a set number of years and
most importantly, the payout is guaranteed. As well, you can choose
your own beneficiary.
The face value of your life insurance policy doesn't decline over
time. Hence, if you applied for $150,000 of life insurance protection,
that coverage would remain constant. You have the option of deciding
for a lower policy amount.
Even if you paid out your mortgage in full, the policy remains
in effect - it is "guaranteed" renewable until you reach a specified
age (ensure you purchase a "guaranteed" policy).
In Canada, we are most fortunate to have various stable and very
sound insurance companies and strong legislation in place to protect
consumers. Mortgage life insurance is a valuable financial product
and should be a part of everyone's financial portfolio - please
choose it wisely. Call an independent insurance broker or agent
to compare with the bank's handy "in-house" insurance.
Also, if you opt to switch coverage, NEVER cancel your existing
policy until you receive a full approval & the physical policy
from your new insurer!
1 Information not warranted for every financial institution.
Please see your individual policy for full details.
* not intended to solicit properties currently listed for sale |
