Buying a new home can be a daunting experience. There's a ton of paperwork and some very legal, very serious-looking documents to sign. It all gets quite overwhelming, especially if it's your first time. One thing that banks love to do is tie mortgage insurance into your mortgage agreement, right along with a dangerous-looking checkbox and signature line you need to fill in if you choose to "recklessly" opt out.
What the banks don't tell you is that you may be far better off taking that leap of faith and signing away that mortgage insurance. Here's why I want you walk into that mortgage broker's office, check that box, sign that line and opt out of it with total confidence.
Let's get one thing perfectly clear: this isn't to say you don't need to insure your mortgage, but in most circumstances, an ordinary term life policy will do far better.
With mortgage insurance, everyone pays the same premium. There are no discounts for, say, being a non-smoker or being healthy (or being a woman who will statistically live longer). So, you're usually not getting the best deal. Even if you aren't a chain smoker who eats a pound of bacon every day, you probably still aren't getting a better deal. In fact, you may be paying for nothing.
A scary, technical-sounding word that simply means that your insurance is "underwritten" to determine if you qualify. Assuming you do, your cost of insurance is based on your age, health, activities and pre-existing conditions, but as long as you qualify and pay your premiums, your coverage is guaranteed and the policy will pay out. The bank's mortgage insurance may use "post-claim underwriting." This means that they'll only decide if you qualify after a claim is made, at which point they may decide you never did qualify and wind up paying nothing. This practice seems terrible, but apparently it really happens, so buyers beware.
The bank's mortgage life insurance benefit value declines as you pay down your mortgage. So, while you continue to pay the same price for insurance, it's actually worth less. Traditional term policies keep their value and usually do so with lower premiums.
With mortgage life insurance, the beneficiary is the bank -- with personal life insurance, you get to name your beneficiary. You (or rather, your beneficiary) will have the flexibility to choose how to spend the money. They may not need it to pay off the mortgage. They could choose to invest the money or just spend it Brewster's Millions-style. In general, though, this means better financial security for your loved ones.
Mortgage life insurance is tied to your mortgage. If you buy another home or chose a different mortgage lender at renewal, you'll have to take it out again. A simple term-life policy will be portable and continue to cover you regardless of who you have your mortgage with.
If you already have life insurance, you may actually already have sufficient (or partial) coverage for your mortgage. Only a proper needs analysis by an insurance adviser will determine that. Your mortgage lender will not bother with this and always cover the full mortgage amount.
Consolidation of Coverage
With private term life, you can consolidate all your insurance needs (mortgage, income replacement at death, education, childcare, etc.) into a single policy. This saves you money on overhead and fees of having multiple plans. With the bank, you can only cover the mortgage and must hold different insurance policies for the rest of your needs.
Finally, remember it isn't just an untimely end that you need insurance for to protect your mortgage and your family. Make sure to consider disability and critical illness insurance in case you become unable to pay your mortgage due to serious illness or injury. Most employers do offer some sort of coverage for this, but always make sure it's sufficient for your needs.
If you're not sure if you have sufficient coverage, a good insurance agent or broker will usually be able to give you practical advice on what works for you.
Tea Nicola is the Co-Founder and Chief Executive Officer of WealthBar, Canada's only full-service online financial advisor offering diversified portfolios of low-cost ETFs, insurance and financial advice. Passionate about personal finance, Tea is looking to change the way Canadians save by making investing smarter, more transparent, and at half the cost of traditional advisors.
How much insurance do you actually need? Sure, there are calculators available online, but trying to figure out how much your home and its items are worth can be difficult. You could end up over-insuring and paying too much in premiums, which is a waste of your valuable money. On the other hand, under-insuring could lead to an unpleasant surprise when you need it the most, like in an emergency situation like a basement flood. You don’t want to be stuck wondering if your policy will cover your waterlogged belongings, so make sure you strike the right balance between paying too much and too little.
You want to insure your business, but what parts should you cover? Or should you insure the whole thing? The temptation is to insure the small things, from the bottom up instead of from the top down. An expert can help determine what should be insured and what type of insurance you need for your business.
A higher deductible means lower insurance costs, but that’s not always the right call. Is a lower deductible better? There is no one correct answer for these questions, as it depends on what you’re insuring. This is when a broker can sit down with you and help determine what needs to be insured, for how much, and what your deductible will be.
Cheaper isn’t always better even if it’s fine for your wallet. As the saying goes, you get what you pay for, and if you’re not paying for the right type of insurance or even the right coverage, you could find yourself having to pay out of pocket when your insurance plan fails to cover your needs.
You insured your business when you first started, but now it’s five or ten years later. Does your policy still adequately cover your needs? Things change, homes get bigger, businesses grow and evolve; your insurance needs should change as well. You don’t want to be caught off-guard if the worst case scenario occurs.
Are you a driver with a flawless record? A student? You might be entitled to a discount, yet you can’t take advantage of what you don’t know. A broker would be able to provide discount options such as combining different insurance plans. This means you get the coverage you need and save some money.
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