Simply put, Mortgage Life Insurance is creditor insurance. What does this mean? Well, if the borrower dies, the insurance company will repay the balance of the mortgage debt to the bank or the guarantor.
The benefits
Life insurance helps protect your family’s financial security in the situation when your dependents are unable to take over your mortgage payments or would need to sell the home if you were to pass away.
This type of coverage can assist to pay the outstanding mortgage balance, discharge fees, penalties, interest owing, overdrawn tax account balance. Some insurers even offer an early payout to help alleviate financial concerns in the event of a terminal diagnosis.
The downside
The unfortunate part about Mortgage Life Insurance is that a number of insurance companies do not underwrite the file at the time of application, they only do so when there is a claim. Why is this “unfortunate”? Well, there have been numerous situations when the claimant has been denied coverage at time of underwriting. If underwriting occurs after the fact and the insurance company finds something they determine to be uninsurable, then premiums are returned and coverage is denied.
If you go the mortgage life insurance route, ensure the file is underwritten up front.
In addition, you pay the premium throughout the life of the mortgage, but get a declining return – insurers payout the mortgage balance only, not the value of the home. In this case, the payout covers the mortgage, but leaves no additional funds for funeral costs, child care etc. For example, if you buy a home today worth $400,000 with a 20% down payment then your mortgage life coverage would be for $320,000. In 10 years, the mortgage balance is only $223,000. Premiums remain the same but the payout is not $223,000, not the original amount of $320,000 which your premiums were based on.
The alternative
In addition to Mortgage Life Insurance, there is Term Life Insurance. Term Life typically costs about the same as Mortgage Life, with respect to monthly premiums, but the payout remains the same throughout the life of the term. If you are paying premiums based on $400,000 worth of coverage, then what you will receive is $400,000.
Term Life Insurance is also more flexible with respect to the amount, it doesn’t have to be the amount of the home, it can be more or less. It can also fill gaps in your employer’s benefit plan.
It is important to look at all of your options and talk to a professional when it comes to your options for Life Insurance. Contact me for some references!
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