When you arrange a mortgage with your bank or other lender you will be offered Mortgage Insurance. It is hard to know what to say. It reminds me of standing at the Rent-a-Car counter trying to determine if I need their “strongly recommended extra insurance”. What to do!!
Yesterday an insurance agent explain it to me like this:
Here’s the concept:
In case of death, Mortgage Insurance will pay off your mortgage.
Here’s the catch:
1. Mortgage Insurance does not underwrite your policy until you apply to have the policy paid out. Underwriting means that they accept liability under an insurance policy, thus guaranteeing payment in case loss or damage occurs. This means that even though you have paid for the insurance, it still may be denied. Apparently only 66% of policies will ever pay out.
2. It’s expensive.
3. The bank is the beneficiary.
4. The cost is the same no matter how much is remaining on your mortgage.
5. You may not be able to insure both you and your spouse.
Here’s the alternative method of securing your mortgage:
Buy Life Insurance:
1. Life Insurance is underwritten at the beginning of the process, ensuring that you qualify before you pay.
2. The cost is less expensive (half) compared to mortgage insurance.
3. You are the beneficiary and you can choose how best to apply the funds.
4. The policy does not depreciate with the mortgage.
5. You can insure both you and your spouse.
Conclusion – The only thing that mortgage insurance has going for it is convenience – point of sale. Clearly purchasing Life Insurance instead of Mortgage Insurance will give you a more secure, higher pay out at less cost.