Take Control of Your Mortgage Life Insurance Protection

Whether or not you are buying your first home, there is often one step the weary home owner may overlook. Just one more decision in an already long line of decisions made. The offer for Mortgage Insurance Protection. What is it anyway, and why do I need it? The short answer is your lender may require you to have life insurance in place to cover the mortgage in the event the Mortgager (you) passes away before the mortgage is paid off. The lender wants the full mortgage paid off in the event of a death. Seems reasonable considering that a spouse may not qualify for a loan on their own, or continue to pay through the life of the mortgage for that matter. As a result they would like to know the mortgage will be paid in full. End of story.

So ok...why not just take the Mortgage Insurance that is offered by the broker (they are required to offer it btw)? Let me dive a little deeper and explain why it is you might want to own Life insurance individually and choose your own beneficiary instead of the lender. Afterall, you are paying the premiums on that policy, you might as well get the full benefit, right?

Let’s Check in on John and Neerja to see how the two scenarios would work in their life situations.

Case Study

Scenario 1

John Age 28 and Neerja Age 24 with 2 small children have just bought a home for $800,000 and have a mortgage of $700,000 paying 3% interest over 25 years (5 year term). The mortgage broker sold them mortgage insurance at the time they signed the mortgage papers for the full amount of the mortgage. They are paying the premiums but they are lumped into the cost of the monthly mortgage payment. Over the next 15 years they have paid off a substantial amount of the mortgage and now have a remaining balance of $350,000, but continue to pay the same amount in life insurance premiums each year. Tragedy befalls the family and John dies suddenly. Neerja receives the house title free and clear when the lender pays off the remaining mortgage balance of $350,000 from the insurance benefit they received from the insurance company.

Despite the fact that Neerja now has the house, she has also suffered a loss of John’s income to the household. She could have used the insurance money to support herself during this difficult time so she could continue her education and secure the job she envisioned for herself before deciding to stay home to raise the kids. She is also very concerned about being able to continue saving for the kids post secondary education, and her eventual retirement. It seems many of her dreams are far out of reach and her control.

Scenario 2

In this scenario John and Neerja declined the mortgage lender insurance offered by the mortgage broker. Prior to purchasing they spoke with their financial advisor about their plans to purchase. He advised them to seek out their own life insurance policy and they were approved for a Joint First to Die Life Term 25 Life Insurance policy for $1,000,000. They wanted to ensure that if one of them were to pass away the children would enough money for their education, and there would be additional funds available to replace one of their income for a period of 2 years. Unfortunately after 15 years John dies suddenly. The insurance company pays Neerja $1,000,000 to her account within a month of John’s passing. She is now able to pay for final expenses and continue to pay the mortgage without interruption. Her remaining mortgage balance is $350,000 and Neerja feels she can continue to pay this as the interest rates are still around 4%, and wishes to remain in the house for now. Neerja invests a large portion of the benefit to grow over time and takes steps to continue her education the following year. As her kids are just finishing up high school and soon to enter university she has some peace of mind knowing there is additional money should the need arise to pay for education costs. She feels confident that in a few years she will re-enter the workforce in her dream job.

Summary

In Scenario 2 Neerja saw the benefit of owning her own life insurance. She received the full $1,000,000 death benefit from the insurance policy her and John set up 15 years prior. In Scenario 1, the mortgage insurance coverage declined over time and was really meant to benefit the bank. They still had to pay the full premiums over the 15 years despite the fact that Neerja only received the value of the mortgage when John passed. As you can see Neerja was much better off owning her own policy with John. They never thought that something like this would happen to them but they cared enough for the family to put the protection level in place. They built in their own legacy. There are important benefits that were not mentioned in this case study I would like to list here.

1. At any time John and Neerja could have converted their term insurance to a whole life policy without further medical underwriting.
2. They could at anytime changed beneficiaries.
3. They could have reduced the amount of insurance.
4. They could have changed mortgage lenders without affecting the insurance or the premiums.
5. If they were to become ill and were no longer able to get life insurance they would have already had it in place.
6. Fully underwritten insurance at time of application is non-cancellable by the insurance company.

Action Point

Next time you are thinking about a large purchase or wishing to take on some substantial debt, consider whether you have enough insurance in place. Take the worry away and know that you have done the responsible thing to protect the ones you love. Next time we can talk about protecting your income or putting enough away for the retirement you desire. If something were to happen you...Do you know what you want to happen will happen?

Brian Brotherston
Watershed Financial Solutions
Qualified Associate Financial Planner
(604) 813-4036