Ask the Money Lady,
I have always got mortgage insurance with my bank but lately I wondered if it would be better to take out separate insurance. Do you think I should have both or is one better than the other?
Dear Curtis – Great that you are protecting your family!
Mortgage insurance is a great way to ensure you protect your family should you unexpectantly pass away. Insurance proceeds used to pay off debt ensures your family can live in your home debt free. That being said, there is a definite difference between bank provided mortgage insurance and insurance you purchase from a licensed advisor such as a Term Life policy. Let’s just talk about the most popular – bank mortgage insurance. It is very easy to acquire, usually 3 little health questions and your all set. But is it the best option? I would have to say NO. You see mortgage insurance is based on Group coverage and is only valid while you have the mortgage with the bank. If you move to another financial institution you will have to get new insurance with your new mortgage. The beneficiary of the insurance is not you, it is the bank. Mortgage insurance (which should really be called debt-insurance) pays out the outstanding balance of the mortgage at the time of death to the financial institution. Even though you had to qualify for the premium at the original mortgage amount, the amount of insurance coverage decrease as your mortgage is paid down, however the premium does not decrease. A Term policy is a much cheaper and superior option when choosing insurance to cover debt.
Term insurance is always less expensive than bank mortgage insurance and the original insurance amount never decreases. The beneficiary is now not the bank, so the money goes to whomever you choose and it no longer matters if you change banks, sell your home or get a different mortgage. The real benefit is that the coverage stays the same as you pay down your mortgage. You own the insurance, not the bank.
When thinking of insurance, there are only three risks of financial loss – death, disability and old age. You must continually revisit and measure your risks to re-evaluate your insurance. Some insurances can be expensive and it is obvious that you need it when you are young, just starting out, or have a family with small children. As you age and accumulate wealth, it may not be as important to provide for dependents that are now married and moved out. When your debts are decreasing, insurance takes on another role for those closer to retirement. It is a great tool to use to pay capital gains tax that your estate will owe upon your death or if you are a business owner, it provides benefits that are protected against creditors. Talk to a licensed insurance advisor to see if there are better options for you and your family. Consider something different than the “cookie-cutter, one-size-fits-all” plan you get at the banks.
Good Luck and Best Wishes,
Written by Christine Ibbotson, Author of “How to Retire Debt Free and Wealthy” Follow on Facebook & Instagram