As part of my Financial Education seminars, the topic of mortgage insurance always comes up.
“I don’t need more insurance, Ken. My mortgage is protected by the bank.”
Is it? Let us examine exactly what you are paying for and what is actually protected.
When you apply for mortgage insurance (as I have done before knowing better), you tick off a few boxes, they give you a price and conveniently add it to your mortgage payment. Thanks. But what they don’t (or don’t do a good job of is) inform you that you still haven’t qualified for the coverage. No, that is figured out AFTER you die. You see, they assess your claim after the fact and if there is any discrepancy between what you said in those tick boxes and how you died, they may not pay out.
But, then what am I paying for?
This may surprise you, but less than you think. Mortgage insurance has a set premium that will not change over time. That’s fantastic, except for the fact that what you are insuring (the value of your mortgage) is going down each year. We call that a “declining benefit” and I don’t know anyone who would purposely pay more to get less.
Here’s an example, your mortgage is $300,000 and your insurance costs you $160 a month. That’s $6.40 per $1,000 of coverage annually. Now fast forward 10 years. Your mortgage is now $210,000 and your insurance still costs you $160 a month. That’s $9.14 per $1,000 of coverage annually. You can’t argue with math!
Oh well, as long as my mortgage is paid off, my family can be financially set
Well, no. Not necessarily. Your mortgage is protected…but that’s it. If you die, the mortgage is paid off and the bank is happy. They got their money. But your income potential is gone. Your family will have a hard time replacing that to cover future expenses. If your family wanted to use any cash from the house, they’d either need to sell and move or take out a Home Equity line of credit.
That’s why I always advise clients to look at personally owned term insurance to protect their FAMILIES should something happen to them. Benefits of a personally owned policy include:
- You control the contract
- Underwriting is done upfront, so any changes in health after the fact will not impact the policy
- Coverage is portable. If you move, you are still covered
- You pay a set amount for a specified time period for a level amount of coverage
- You name your own beneficiary
- Upon death, the FULL AMOUNT is paid out to the to do what they want with.
See? Undeniable evidence that mortgage insurance is a bad idea. If you are looking to buy a new home, or currently have mortgage insurance, I strongly urge you to let us look into replacing it with personally owned term insurance. Better coverage. Better Price. Better sleep!
Kenenth Coombs CFP CHS RRC
Ken has 12 years experience in the financial services industry, is a Registered Retirement Consultant and a Certified Financial Planner. Ken has written financial planning columns and has been a guest on financial radio and podcast programs.