On the surface, it makes sense to insure one of your biggest debts: your mortgage. Mortgage insurance covers your outstanding mortgage amount should you die before your mortgage is paid in full. While that sounds like a good idea, there are some important features of mortgage insurance that you should be aware of.
- Mortgage insurance is a considered a declining benefit, meaning the amount of coverage you are entitled to decreases with each mortgage payment you make. The premiums are not guaranteed to decline at the same rate or even at all.
- There is no flexibility in terms of coverage with mortgage insurance. This type of insurance benefit offers no opportunity to change as your own needs change. You cannot allocate a beneficiary, as the benefit is automatically paid to the mortgage lender.
- Mortgage insurance in comparison to life insurance is not always portable. If you change mortgage lenders before your mortgage is paid off, your mortgage insurance may not transfer to your new lender. You will have to requalify for mortgage insurance and may be required to undergo a physical examination or provide recent health records. There is no guarantee that you will receive coverage.
- Mortgage insurance offers no protection should you be unable to work due to disability.
While death is certain for all of us, receiving any benefit from your mortgage insurance is not certain at all. In the event that you remain healthy (and we hope you do!) and pay off your mortgage, you will have spent hundreds or thousands of dollars for a benefit that you are no longer eligible to receive. Luckily, life insurance benefits have evolved significantly over the past few decades and can be a much smarter way to protect your home and your family.
There are three different life insurance products that can effectively replace mortgage insurance. These are critical illness insurance, term life insurance, and permanent life insurance.
- Critical illness insurance is actually a living benefit, meaning you are entitled to receive it upon diagnosis of an illness or disability covered by your policy. It is a lump sum benefit that you can use to your own discretion for things like medical expenses or to pay off your mortgage.
- Term life insurance is a low cost insurance option that covers you for anywhere from 10 to 30 years, depending on the policy that you purchase. If you die during the term, a benefit is paid out to your beneficiaries. Your beneficiaries can use this money to pay off your mortgage. Term life policies are typically only in force up to age 80.
- Permanent life insurance is a unique product that provides lifetime coverage and can accumulate cash value over time through a tax-advantaged investment component. There is no upper age restriction for permanent life insurance policies. There are a few different types of permanent life insurance and you can choose the policy that works best with your budget, financial goals, and risk tolerance.
There are two significant advantages to life insurance that mortgage insurance simply cannot compete with. First, the benefit doesn’t decrease over time. If you die with only one payment remaining on your mortgage, you have spent a significant amount on premiums for a benefit that pays out an extremely small amount of money. Your life insurance will always pay out the benefit agreed upon at the time you purchased the policy. In some cases with permanent life insurance, your beneficiary may receive even more than the minimum agreed upon benefit. Second, the benefit can be used any way you or your beneficiaries need to. This flexibility is great since circumstances and needs may change over time.
Before you purchase life insurance, you should complete a needs analysis to determine what type of coverage to purchase and how much. Simply stated, a needs analysis helps to quantify your family’s immediate cash needs and ongoing income needs in the event that you pass away. Immediate cash needs are things like your mortgage, loans and debt, emergency savings, children’s education, funeral expenses, and final taxes. Ongoing income includes the income that will be required to meet regular monthly expenses and the number of years your family would need to rely on this income.
CG Hylton Inc. has been a leader in offering Calgary life insurance policies to companies and individuals for over 19 years. Our licensed and highly qualified insurance specialists can put together an individualized policy that meets your needs and budget. We have made it easy for you to get a free, no-obligation online quote with our online instant quote tool! If you have questions, please contact us anytime to find out how we benefit you.