Life Insurance and your Mortgage – Consult with a Vancouver Mortgage Broker
Canadian Mortgage News
CMI 101 Series
Dreyer Group 101 Series
First Time Buyers
Home Buying 101
Life Insurance and your Mortgage
A life insurance policy to cover your mortgage is often required by a lender when you apply for a mortgage. This policy is often offered by a lender so you don’t have to take that extra step in obtaining a policy.
But, even though the lender is offering this convenient service, it has a number of different disadvantages, so you might want to consider an alternative.
The alternative presented can be more advantageous and will most likely save you some money.
Mortgage Life Insurance Explained
Any mortgage insurance policy which is offered by the mortgage lender is generally not one of their products but is a policy which is proffered by an insurance company. Many people simply go along with this service because of its convenience.
These policies are generally easy to obtain and usually does not require a medical exam. These policies are often referred to as no-exam insurance policies. You have no doubt seen commercials or advertisements which offer this convenient to obtain life insurance policy.
Reasons Why Lender Mortgage Life Insurance is Not the Best Purchase
Although these policies are simple to get there are several reasons why they are not the best purchase you can make when it comes to mortgage life insurance. These reasons include:
- Type of Policy has Drawbacks
The mortgage life insurance is generally of a type known as a “decreasing term life insurance”. What happens with this policy is that as you pay your premiums the amount of death benefits decreases. There is really little benefit to your or your family other than the mortgage coverage.
- You are Not the Beneficiary
On most life insurance policies you can name your beneficiary. On this type of lender sponsored mortgage life insurance policy, the lender is the sole beneficiary. You are paying for a policy out of your pocket where only the lender benefits.
A No-Medical Exam Mortgage Life Insurance is More Expensive
Any life insurance policy, whether privately bought or through a lender which does not require a medical exam is always more expensive than a policy which does require a medical exam. This is because the insurance company assumes more risk because they know less about your state of health.
These types of policies can cost as much as one third more than a standard term policy which requires an exam.
A $500,000 30 year term life insurance policy with a medical exam may cost a 25 year old male about $360.00 per year. The same policy without a medical exam may run around cost as much as $475.00 per year. Over 30 years, you could up paying as much as $3,750 more out of your pocket simply because you bought a more convenient policy.
Consider an Alternative
Instead, if you bought a level term policy worth $500,000 through an insurance broker and took the medical exam, you would have a policy that would benefit you and your family for your entire life and still satisfy the lender’s requirements.
Additionally, you will be empowered to name your own beneficiary. The death benefits proceeds would go directly to your beneficiary in a lump sum tax-deferred payment. If, 20 years down the road and you died unexpectedly, and have paid your mortgage down to say $175,000, your family could not only pay off the mortgage but would have an additional $375,000 in extra benefits as a financial cushion.
You would also save a fair chunk change on the amount you pay out in premiums over the years. You will need life insurance anyway, and you might as well buy it when you are young because it gets more expensive to buy as you age.
You have to have mortgage life insurance, so take the time to shop around and use an independent agent to compare rates and get some advice before you jump on the lender’s band wagon. Mortgage life insurance sold by a lender may not be such a good deal.