You’ve just made the biggest purchase of your life: A new home for you and your family.
What’s the best way to protect your investment if you should die prematurely? The bank will tell you mortgage insurance.
The banks will not let you sign off on the mortgage unless you take out mortgage insurance which pays the balance of your mortgage to the bank if a person listed on the mortgage passes away. Unfortunately, this is not done out of concern for the buyer, the banks are in the business of making money and they have tied the sale to the mortgage. You are expected to purchase this insurance when you sign your mortgage papers. Mortgage insurance is offered by the bank and typically involves answering a few basic health questions. They even add the premiums to your monthly mortgage payments for simplicity.
But that convenience could be costly.
The most important thing to remember about mortgage insurance is that even though you are paying the premiums, you’re not necessarily covered. These policies use post-claim underwriting, meaning that the insurance company will delve into your medical history after a claim is made. The policies are post- claim generally because the financial planner that sets up your mortgage is not qualified to sell the insurance. They are the middlemen for an insurance company. You will be issued a certificate of insurability.
If you have a health condition when you sign the papers — whether you and your doctor are aware of it or not — and it is not disclosed, your claim will be denied.
This means, even though you have been paying the premiums, no benefits will be paid. This happens more often than not, as the underwriting after death generally will show the cause of death as reason to be uninsurable. That does not seem like a good deal for a grieving family that thought they were covered.
There are key differences between mortgage and term life insurance.
Although mortgage insurance benefits pays out only the amount left owing on your mortgage if you die, the amount of coverage declines as you pay down that balance every month. Unfortunately, your premiums stay the same and will increase, as you get older because you need to reapply for the insurance every time you renew your mortgage. If for some reason in that span of time, you find yourself with health problems you are no longer eligible for mortgage insurance.
So your mortgage decreases as the years go by while paying more for something that’s not guaranteed, you’re paying a higher premium and getting less.
Term life insurance is just that — an insurance policy that covers you for a set number of years, typically 10 to 30 years. The premiums, and the amount that your beneficiaries receive if you die, will stay the same through the life of the policy. As long as you continue to make the payments the policy will remain in place.
The other key difference: Your family receives the payout and decides what to do with it. Some people view that as a benefit because the family may be looking at alternatives, rather than paying off the mortgage. They may have other high-cost debts they want to put the money towards.
When purchasing term insurance, you may need a blood sample or urine sample upfront, and the insurance company may need to contact your doctor. This is part of the underwriting process, depending on your age and health, the premiums on mortgage life insurance can be much higher than for a term life insurance policy.
For example, a couple where both partners are 30 would pay $36 per month on mortgage insurance premiums for 5 years, but they would pay $24.53 a month on a 10-year term life policy. The difference becomes more pronounced with age. Two 40-year-olds would pay $80 per month for mortgage insurance but just $36 for a term policy. Two 50-year-olds would pay $160 for mortgage insurance, but only $73.35 for term life.
Keep in mind that mortgage insurance is not portable. If you switch lenders, you’ll need to take out a new policy. Term life insurance is portable, because it’s attached to you rather than your debt. You can decline mortgage insurance if you already have personal life insurance in place.
The key thing to remember is that you should be covered because as we know anything in life can happen. Family security should be part of your financial planning don’t take a chance when dealing with your families future. The choice is always yours, if you have to sign up for the mortgage insurance at the bank you can cancel it at any time, but purchase term life coverage to cover your debts.