Insurance is a service that’s offered by manufacturers, financial service providers, and other companies. Not all insurance pays off, and the failure to buy does not always lead to disaster. For example, insurance on consumer electronics may not be worth it as the cost of insurance can always go towards a replacement that’s not outdated. It is important to understand what the costs are and if the benefits are worth it.
Your choices as a consumer
There is a variety of insurance products available for lenders and buyers. Mortgage loan insurance protects the lender against default from the home buyer. The mortgage broker may require customers who aren’t able to contribute above a certain level to purchase loan insurance.
In the case where the homeowner is unable to meet their financial obligations, the difference between the sale of the property and any payments made towards the mortgage will be recovered by this product. The loan protects the lender.
Mortgage life insurance allows you to keep the title of your home. Depending on the terms of the contract, the death or diagnosis of terminal illness with life expectancy of less than an additional 12 months triggers the benefits. The insurance will pay the remainder of the mortgage. Unlike loan insurance, mortgage life insurance is not usually mandatory.
It’s not exactly life insurance
Life insurance and mortgage life insurance work in similar ways. Premiums are paid regularly and benefits are released upon death. Within life insurance policies, there are differences as well. Broadly, there are protection policies and investment policies. Generally speaking, life insurance is meant to cover the income stream that is lost in the absence of the insured.
Mortgage life insurance addresses debt. Typically the purchase of a home costs one-third of overall income. In short, the proceeds of life insurance are greater and compared to the premiums, usually a better investment.
Premiums can be tricky
Premiums are payments made to the insurer on a regular basis, for example once a month. As you pay your mortgage, your debt declines. Mortgage insurers adjust your rate to reflect the decreased obligation. Furthermore, if you fall behind on payments or if the value of the home changes, these facts are not incorporated into calculating your monthly payments. Some argue that the adjusted rate is still not a good investment for the premiums you pay.
On the other hand, life insurance proceeds remain the same. Although the point in time that the benefits are paid will determine the ultimate value received because of the time value of money, the proceeds paid will not rapidly decline, like it does near the completion of a mortgage.
Taking the time to consider
When signing the mortgage, the mortgage brokers will offer the mortgage insurance. As discussed above, there are benefits to the product. Depending on your particular case, there may be options better suited to your circumstances. Because of the variations in insurance policy names, if you’re opting for life insurance, it’s better to purchase it from an insurance broker or provider.
Continuing the mortgage
If your home still has a mortgage on it, it is often possible to maintain the terms of the mortgage when it’s inherited. It may be advisable for your spouse or family member to receive the proceeds from life insurance and invest the sum. Their returns may be greater than the interest on the mortgage.
What the options are
If you already have life insurance, chances are mortgage insurance is not the best investment of your money. You can buy term life insurance in addition to what you have for the same amount on the remainder of the mortgage for less. Term life insurance is simply a series of benefit payments of a specific amount for a specified time.
In case of other health risks
Just as there is disability insurance, there’s also mortgage disability insurance. Disability insurance has many variations as well, and usually limits its payouts at a pre-determined ceiling. Mortgage disability insurance has similar issues with the declining amount insured. Furthermore, there’s usually a cap on payments to beneficiaries. At a large Canadian bank, the maximum payment of a regular policy is $3,000 per month, per person.
Some insurance premiums are tax deductible. Furthermore, insurance benefits are generally taxable to the recipient. In your calculations, tax consequences will affect your returns.
Michael West V is a programmer, writer and investor. He started programming in 1990’s and has been creating products which explore new metaphors.