MORTGAGE INSURANCE
Mortgage Insurance is life insurance. The coverage sold by banks, mortgage lenders and some life insurance companies is actually decreasing term insurance. That means the amount of coverage decreases in line with the mortgage debt. If a borrower with this type of coverage dies, the coverage in force is just enough to pay off the outstanding amount of the loan.
It's important to know that in some cases the underwriting with this type of mortgage insurance takes place at the time of death rather than at the time of application. If this is the case it means that the mortgage holder's insurance provider could decline paying the claim at the time of death if a borrower had a pre-existing health condition when the mortgage insurance was first acquired.
Instead, I recommend my clients consider an individual or joint 10 Year Term Policy to cover their mortgage debt. The cost will be less than what their bank charges and both the amount of coverage and premium will remain unchanged for the first 10 years. So if an insured dies five years after purchasing the policy, the beneficiary will receive more insurance money than the outstanding mortgage balance.
In most cases people can actually acquire their own life policy for a similar amount of coverage for much less money than what it costs through a bank. One of the reasons for this is because banks don't discriminate between smokers and non-smokers, so non-smokers are actually subsidizing the bank's clients who smoke.
The benefits of owning your life insurance policies are many:
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The insured(s) own the policy, not the bank, so the insured(s) control who gets the insurance money.
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Individual underwriting can provide healthy applicants with even lower, preferred premium costs.
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Premiums can remain level (the same) for the term of the policy.
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If the insured(s) are diagnosed with any kind of medical condition during the term of their policy, the coverage can be guaranteed renewable and convertible for the lifetime of the policy.
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If a mortgage rate is attractively low, the beneficiary can decide to invest the insurance money rather than pay off the mortgage.
A life insurance policy can be used to provide:
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funds to cover your final expenses
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funds to repay loans and mortgages
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sufficient investment capital to replace your earned income for the benefit of your financial dependents
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capital for bequests to relatives, charitable organizations, etc.
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elimination of estate taxes for monies and property you leave to your children
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provision of a tax haven which can allow either tax-deferred or tax-free treatment of your investment dollars
You may use life insurance for business purposes too, such as providing funds to buy out the interest of a deceased partner or shareholder. Many Partnership Agreements require that such policies be in place.
Key Man Insurance involves coverage on an employee or owner of a business which will provide sufficient funds related to the replacement of a key individual in the event of an untimely death.
