Term or Mortgage Insurance?
For many of us, purchasing a home can be one of our biggest life decisions. Often that purchase involves a substantial mortgage and years of debt. Slowly paying down the mortgage creates for many their biggest family asset base. Many homeowners decide to add mortgage insurance to cover the remaining mortgage debt due in the case of the death of one of the owners.
Taking proactive steps to care for surviving family members is responsible, caring, and commendable. Because life is busy, many homeowners choose to add the lending institution’s mortgage insurance because it is easy. We believe there is a superior alternative that puts you and your family first.
Term insurance is often a better overall solution for you and your family. In this article, we will compare similarities while also contrasting mortgage insurance vs. term insurance.
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To help illustrate, let’s consider a case study of a family. A married couple, the Smiths, with two children, purchase a $1,000,000 home and carry a $500,000 mortgage with a 20-year term. The couple obtains a mortgage at the bank and is offered mortgage insurance that can be blended into their monthly mortgage payment. Before agreeing, they sit with their personal insurance specialist at Bryson to get a term insurance quote. Premiums come back equal, but the couple chooses the term insurance over the mortgage insurance.
Why did they choose individual term insurance to cover the mortgage?
Surprisingly, ease of insurance is actually easier with mortgage insurance. The bank asks a few standard health questions but holds off on doing a medical check until a claim is made. What does this mean? After death, the mortgage insurance company often analyzes medical records to determine insurability. And what does that mean? The mortgage insurance company can reject payment and instead only return premiums paid over the policy’s life.
CBC MarketWatch investigated Lender Mortgage Insurance in a segment called “In Denial.”
How was obtaining term insurance different? The Smiths were asked health questions from their personal insurance specialist and were required to complete a medical exam before the insurance policy was issued. When approved and delivered, the Smiths could rest with peace of mind knowing they are properly insured.
What else did the Smith family love about their own term policy? Just that, they own the policy and can select their own beneficiaries. This is different from lender mortgage insurance, which names the lender as the beneficiary. With term insurance, the Smiths are in control of their future and can name each other as beneficiaries (instead of the lending institution).
Why is this important? The surviving spouse can make powerful decisions with the payment received. Maybe paying off the mortgage is the best option, but maybe it makes sense to pay down other higher interest debts accumulated or other supports the family requires in its time of need.
While these are significant differences, the biggest is getting what you pay for. Warren Buffett’s wisdom: ‘Price is what you pay, value is what you get’ rings true in this discussion. While the premium payments may be similar, the payout can be significantly different. With lender mortgage insurance, the coverage decreases with the remaining balance of the mortgage. With term insurance, the premium payment and death benefit remain what was initially agreed to.
The Smiths also knew they would likely be moving within the next few years. They knew this was an opportunity to get proper insurance while healthy, which helped keep premiums down and the coverage reliable regardless of who carries their mortgage.
The Bottom Line
To help you make an informed decision, we offer to complete with you an insurance health check. We will evaluate the insurance coverage you have in force today and compare it with what is important to you.
Take us up on our offer by contacting us at 1-800-661-5196, email your dedicated account manager, or send a general email to firstname.lastname@example.org.