May 26, 2009, 5:00 am

Taking a Life Insurance on Your Mortgage or a Term Life Insurance? Part 2

by: The Financial Blogger    Category: Insurance
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Last Friday, I explained how the life insurance on a mortgage works. However, if you do not combine the life insurance with another type of creditor insurance (such as disability insurance or critical illness insurance), chances are that your life insurance will become quite expensive.

If you shop around and look for other option, you will soon come to see an insurance broker/agent that will look at your overall insurance needs. There will obviously have an amount to be covered that comes from your recent mortgage. Here’s a way to cover your mortgage with a term life insurance:

#2 Term life insurance from a broker

Term life insurances are pretty easy to understand. You pay during a specific period of time (usually 10 years or 20 years). The insurance coverage last the very same time. Therefore, you benefit from a temporary insurance coverage that will eventually expire.

This is actually a good thing as your mortgage won’t be eternal as well. Many term life insurance offer conversion option into a longer term or a whole life / universal life insurance policy. In a case of a mortgage, this could be useful if you plan to sell your house and buy a bigger one with a similar mortgage in the future.

While the T10 and the T20 are the most common type of term life insurance, I know that there are other terms that could fit best your insurance needs. You can also use a combination.

IF you have a 300K mortgage over 30 years. You would take a 100K T10, 100K T20 and a 100K T30 (if it exists). Therefore, your insurance coverage will drop every 10 years as your mortgage balance does over time. You will be “fully covered” during your 30 years but you won’t have to pay for a full 300K T30 either.

The price for a term life insurance is usually much lower than the regular creditor insurance. Even though it is the same price, remember that the full amount of coverage is payable upon death during the time of the contract. If you pass away after 19 years of paying down your mortgage, the lump sum payment from the bank will be pretty far away from the original mortgage amount! We never look for insurance in order to “make gift” but getting extra money when you lose someone you love could never hurt!

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With Mortgage Life Insurance… With Personal Life Insurance to cover your mortgage…
Do I own the Policy? NO
Because mortgage life insurance is a type of group insurance, it is owned by the lender – who has the ability to cancel the group policy at any time. YES
A personal life insurance policy is owned only by you. Accordingly, you are the only person with the power to cancel or make changes to the policy.
Can I choose the Policy’s beneficiary? NO
The mortgage lender or financial institution is the sole beneficiary of mortgage life insurance, as well as the owner. The lender will use the death benefit proceeds to pay down the remainder of the mortgage. YES
You decide who the beneficiary will be. In the event of death, your beneficiary can choose to spend the benefit however he or she sees fit. They do not have to put the proceeds toward paying down the remainder of the mortgage (but can do so if they like).
Will the Death Benefit remain consistent? NO
As the amount of your mortgage decreases, your coverage drops as well. However, you have to keep paying the same premium, meaning that over time you get progressively less value for your money.

With mortgage life insurance, the death benefit pays only the balance of the mortgage in the event of death. YES
With a Personal Life Insurance plan, the amount of the death benefit does remain consistent.

So long as you’re paying your premiums, the death benefit will always be equal to the face value of the insurance you purchased. If you purchased $150,000 in insurance, the death benefit will be $150,000.
If both my spouse and I are involved in a common disaster, will the death benefit be paid for both spouses? NO
Should both spouses pass away, the bank or lender will use the death benefit only to pay down the remainder of the mortgage. Essentially, the death benefit is paid to the lender and the policy owner’s family does not receive anything beyond the knowledge that the mortgage is paid off. YES
The insurance company will pay the death benefit, for both of the lives insured, to the specified beneficiary. As an example, if both a husband and wife are each insured for $125,000, the total benefit paid would be $250,000. Beneficiaries can use this payment as they see fit.
I’m in good health. Can I get a better rate? NO
Mortgage Life Insurance premiums do not take health into account. YES
Many companies will offer a preferred rate to you if you are in good health. Homeowners who are healthy and who have a good family medical history can qualify for significant premium discounts.
Is my coverage Portable? NO
If you have Mortgage Life Insurance and you switch lending institutions, you must reapply for coverage. YES
With a personal life insurance policy, you always own your coverage and it will stay with you. Note that you might need to reapply if you decide after purchasing the policy to increase your coverage.
Is my Policy Underwritten when I apply for it? NO
In the case of bank mortgage insurance, underwriting is done at the time of death. In some cases, mortgage insurance is offered with minimal background checks. This can result in major problems if the bank’s insurer decides to dispute the claim. YES
Personal Life insurance policies are underwritten at the time of application. If approved, you can be confident that the insurance company will pay the claim. Note that there is an option for the company to contest a claim, during the first two years after application, in the case of non-disclosure or fraud.
Can I convert the insurance plan? NO YES
Most term policies allow you to convert them to permanent products at any time, without the need for a medical exam.
Can I Continue the coverage after paying off my mortgage? NO
Your mortgage insurance expires once the mortgage is paid off. YES
Upon paying your mortgage, you can choose to continue, convert or cancel your insurance coverage.
Do I have any other options or policy riders? NO
In most cases, no options or riders are available. YES
You can customize your policy with options and riders such as Waiver of Premium, Accidental Death, and Children’s Insurance

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