When you get a mortgage, the bank will often ask you if you want to get mortgage life insurance as well.
What exactly is mortgage life insurance?
Simply put, it’s a life insurance policy that will pay off your mortgage if you were to pass away before your mortgage is paid off in full. For an extra cost each month (the amount varies based on a number of factors, including your age and health), you can rest assured that your dependents wouldn’t be stuck with mortgage payments should you die unexpectedly. The bank adds the cost of the insurance to your regular monthly payment, and you’re off to the races. How much more convenient can it get? Sounds like a good idea, right?
Not so fast. There’s always has a catch, as you should know by now. In this case, it can be a fairly expensive catch. Yes, life insurance is a good idea. However, my personal opinion is that you shouldn’t buy it from the bank. Why not? This is why:
- the mortgage insurance only pays out the balance of the mortgage owing
- the cost of the mortgage insurance remains the same
- you have no choice in what happens to the money
- you are protecting the bank more than your family
What does this mean exactly? Let’s say, for example, that you are paying $75 per month for $250,000 worth of life insurance on your mortgage. As you pay down your mortgage, the balance owing is less and less each year. After five years, maybe now you only owe $200,000. Yet you’re still paying $75 per month. After ten years, now you may only owe $150,000, but still your payment is $75 per month. And so on. Each month, you are getting less value for your $75 monthly payment. For the purposes of this example, let’s say that you owe $150,000 at the time of your death. Your life insurance will pay out that $150,000, but that’s it. Yes, your mortgage is now paid out, but there is no extra money for your estate or your beneficiaries. You have basically paid for $250,000 worth of life insurance, but you only utilized $150,000 of that insurance. Is this really the best use of your insurance dollar?
So does this mean that you shouldn’t get a life insurance policy to pay out your mortgage if you die? Absolutely not.
My suggestion to you is that rather than purchasing this insurance through a bank, you buy regular life insurance from an insurance broker.
Get a policy for $250,000 which is specifically earmarked to pay out your mortgage. Your monthly payment will probably be very much the same as with the bank, but the benefit is that you will always have $250,000 in life insurance as long as you make your monthly payment (or until you reach a certain age, depending on the type of life insurance you get). Plus you can designate a beneficiary for this policy. So if you were to die and you owed $150,000 on your mortgage, your beneficiary can pay out the $150,000 owing on your mortgage and still have $100,000 left over. Or they can use the money to just pay a portion of the mortgage, or continue making the regular mortgage payments This is a much better scenario than the one I outlined above.
So when it comes to life insurance, make sure you ask questions and do your research. Talk to an insurance broker before you make your final decision.
Meena’s Note: Occasionally people won’t qualify for an individual life insurance policy that is large enough to cover your mortgage. And there is a bit of delay to get a life insurance policy set up. So I recommend taking the insurance provided by the bank, then talk to me right away about your other options. You can always cancel the bank’s policy later on, once your new policy is all confirmed.