This is a guest post written by Denise Mancini from Accuquote.com. I normally get offers for guest writers who have something to promote and they offer to write a free article in exchange for links to their websites. They do this because more links from more websites make them rank higher in Google searches. Normally I turn them down because they are irrelevant or poorly written. However, this post has some good main points so I decided to run it. Over to Denise.
One of the largest purchases in your lifetime will most likely be your home. If you have bought one or are planning to, chances are that you have looked into a mortgage in order to afford one. As time passes, and you pay your monthly mortgage payments, have you ever given any thought to what might happen to your family or for that matter to your home itself if you die suddenly? Would your spouse or children have to give up their home and loose a precious asset in the bargain? A sound financial plan would considerably help matters in such instances. And part of such a plan would have to be a comprehensive term life insurance policy.
Term Life Insurance is the ideal vehicle for protecting your family and your home. This type of insurance can offer stability in terms of your finances when you most need it. If you have a term life insurance policy and you die, the death benefits of the policy can be used in a number of ways. For example, they can offset the cost of the funeral, they can be used to pay off any remaining debts, they can act as a source of income for your family in your absence and they can also pay off your mortgage. If you die within the term of the policy, you can be assured that your entire mortgage will be paid off. Such security would obviously depend on the length of the term and the amount of coverage taken. For example, if your mortgage were a 30-year one, it would be wise to choose a 30-year term life policy as well.
That said, term life insurance also covers more than only your mortgage. When you choose the amount of coverage, you need to calculate all your other debts (auto loans, personal loans, credit cards) that will be left to your family to pay off in your absence. Life insurance can protect your assets and pay off any pending debts. Your family might otherwise find it impossible to clear your medical bills, car loans and credit card debts. In this way, life insurance can leave your other assets for your family to use. By providing much needed liquidity to your estate, life insurance prevents cashing in and selling off your other investments to make ends meet. The benefits of a policy are made available immediately after a death, thus averting a financial crunch.
When you purchase your mortgage, you might be offered a mortgage life insurance as well. However, before signing up for one, do weigh the pros and cons versus a normal term life insurance policy and you may end up saving a lot of money. For example, with mortgage life insurance, the amount of coverage is determined by the amount of mortgage owed. Unlike a term life policy where you can decide how much coverage you need. Once your mortgage is paid, the mortgage insurance is not applicable whereas a term life policy can be kept in effect for as long as you require. And finally, with a term life insurance policy, you determine who your beneficiaries are but with a mortgage life insurance, the lender is automatically the beneficiary. With the right investigations and questions, you will soon realize that a term life policy will have lower premiums and offer more flexibility and coverage than a mortgage life insurance policy.
Buying term life insurance to protect your family from losing their home. Neat idea. Equivalent to your family buying a put option on your life.
Mark
The last sentence is key. “With the right investigations and questions, you will soon realize that a term life policy will have lower premiums and offer more flexibility and coverage than a mortgage life insurance policy.”
CBC’s Marketplace had a story on car-loan and mortgage insurance. Their investigation found that the insurance is often declared void after the insured dies, because they had an existing medical condition or were even tested for a medical condition. Has your doctor checked your blood pressure? Ever had a pap smear? (being male, I haven’t, but you get my point)
@Gene – yes, one of the differentiators is that underwriting is done at time of application with private life insurance, whereas creditor-provided insurance underwriting is done at time of claim (so you’ll never really know if you were covered until after the fact!)
Holy pingback batman, what’s up with that?
Saying it’s “wise” to buy a 30 year term to match your mortgage sound reverse to me. I don’t see how anyone could estimate the shortfall of their estate 30 years into the future. It sounds like a car salesman trick to get you to buy the absolute most for the first few years when you have the highest mortgage debt. Down the road do you need coverage for 90% of your mortgage when you’re 5 years from paying it off?
And why do you need coverage for a car? The person is dead, so sell it and pay off the remaining car with the balance.
@Jordan – you can simply reduce your coverage over time, but you would have to do it manually. Creditor provided insurance has a declining benefit, but is automatic.
I’m glad that your users found this article helpful. Thanks for republishing it.
Denise
I will thank you too. It’s a nice and helpful article. Especially for a friend of mine!
Thanks.
Rik
Great post! Very informative and helpful… I can see that you put a lot of hard work on your blog, I’m sure I’d visit here more often. Maybe, you want to come by my site too. It’s mainly about Do it Yourself Credit Repair . I’m sure you’d find it useful. thanks!
Great post… Really good perspective on the subject and very well written, this certainly has put a spin on my day, many thanks and keep up the good work.
Mortgage Protection Life Insurance is designed to repay the outstanding balance on your mortgage if you die during the period of cover. The amount of cover decreases in line with the outstanding balance on a standard repayment mortgage. Having some form of mortgage life cover is essential to protect your home and your family. A mortgage life cover policy will ensure
that this does not happen, and will give your family the
security of knowing that whatever happens they will still
have a roof over their heads.
http://www.onlyinsurance.com/
Hi Preet,
Two things which was missing here is the ability to convert to permanent life insurance. Most insurance companies allow you to do that. One company that does not have that feature would be Primerica (which charges higher rates for women as well!).
The other is term (which I own) is renting coverage. Claims are paid on 1% of all term policies owned. If one is forward thinking, you can get back all your premiums back pay less taxes and still have protection for your family.
Do banks offer this ability to convert to permanent insurance? I got a call this week from my house insurance agent asking if I was interested in buying term insurance for my mortgage instead of paying the bank $20/month for the insurance that ends when I pay the house off. Term is sounding much better right now. I’m glad to see this news on the blog, thanks Preet.
Bikergofast says:
Do banks offer this ability to convert to permanent insurance? I got a call this week from my house insurance agent asking if I was interested in buying term insurance for my mortgage instead of paying the bank $20/month for the insurance that ends when I pay the house off. Term is sounding much better right now. I’m glad to see this news on the blog, thanks Preet.
Answer: No
Term is great for many people, I have it myself. Remember, if you like renting then over time renting like term is way more expensive.
Since many people do not understand income taxes or corporate taxes they also do not understand permanent life insurance.
One example I have on my web site is under free financial tools person A vs. person B.
If you want to have more money in retirement, pay less taxes review this.
cheers,
Brian
Thanks Brian, I’ve gone ahead with a “return of premium” policy for 30yrs, so I’ll get something like 80% of my premiums back after 30yrs. More coverage for longer than the bank for much less in the long run (although double the price right now).
Bikergofast ,
I am curious what exactly you have. If you have term policy for thirty years? If what you are looking for is return of premium, you could do that in twenty years with 100% money back.
Brian
Thanks for the replies Brian.
I guess I’m paying extra for the security of having a $100k policy until i’m 65 with some return of premium. It’s more to cover my mortgage right now anyway. I’ll check out your site as I have other questions too.
Here is an interesting story from the National Post
http://opinion.financialpost.com/2010/11/24/three-in-ten-dont-have-life-insurance/
Jonathan Chevreau November 24, 2010 – 10:50 am
Three in ten Canadians lack life insurance, according to a TD Insurance poll released today. Not surprisingly, six in ten don’t have the more esoteric critical illness insurance.
Actually, it’s impressive that 70% DO have life insurance, considering there are so many single people who don’t really need it. Of the 31% who lack coverage, TD says 40% don’t think it’s necessary, 23% admit they “probably should” have it and 23% say they just can’t afford it. In addition, 33% worry they aren’t adequately protected by their insurance policies.
Brian
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