Whenever you are about to sign your new mortgage document, your banker will ultimately talk to you about creditor insurance. He may sound annoying but he must explain the different creditor insurances that exist to cover your mortgage (it is required by law). It is actually very important to have the right amount of coverage and the right type of insurance. Some people may think that it’s gambling on your own life or that insurance is some kind of hidden tax. However, the truth is that if you pass away and you leave a spouse and kids behind, they will be in the deep hole if you were not properly insured.
So if you plan on dying while having a mortgage (this is my black sense of humour 😉 ), you have two options to cover your property:
#1 Life insurance on your mortgage
This is the usual insurance coverage offered by banks when you contract any credit with them (personal loan, line of credit or mortgages (including HELOC)). As you take your credit agreement with bank X, you have no other choice but to take their insurance if you want a bank to pay for your debt.
The mechanism behind a life insurance on a credit is quite simple. Upon death, the bank will erase the outstanding balance off its book and the estate is not responsible for this debt anymore. On a regular mortgage, you will have equal premium to pay during the amortization. As long as you do not change the mortgage contract, your premium will stay the same and you will still be insurable even if your health condition changes. However, paying a $100 monthly premium to cover an outstanding debt may seem appealing at the beginning of your mortgage (when you owe 200K) but become a pain when you are at the end of your contract and you only owe 20K…
Since the Home Equity Line of Credit has increased in popularity over the past 5 years, the creditor insurance product evolved accordingly. In fact, the life insurance on a HELOC will cover the average balance of you line of credit and the premium will be calculated accordingly. Therefore, you will pay a smaller premium if you make a lump sum premium. However, some contract will also make your premium increase according to your age. Therefore, event thought you will still remain insurable as long as you have your debt, your premium might increase or decrease depending on how you use your line of credit.
If you shop around, you will notice that life insurance on mortgage alone is probably more expensive than a term life insurance that you will take with a broker. However, the term insurance might not cover the full length of your mortgage (most of the time you can take T10 or T20). However, life insurance on credit gives you the opportunity to add disability insurance and critical illness. As opposed to the life insurance, the later two will benefit to you and not to your estate 😉
Monday, I’ll describe the term life insurance to cover a mortgage. Enjoy your weekend 😀
image source: flickr
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