With home prices having risen significantly over the past decade, and consequently the amount of the mortgages used in their purchase, the value of having proper risk management in place in the case of an early death has never been greater.
In regards to your mortgage, this will primarily involve having adequate life insurance coverage in place to ensure that the balance is paid off if death occurs.
When you are in the process of negotiating your mortgage, your financial institution will undoubtedly offer you its "bank" life insurance coverage. While this coverage can be easy to set up, it is unlikely to provide the same benefits you would receive with individually-owned life insurance coverage.
The following will summarize the main differences between the bank-owned and individually-owned life insurance methods.
With Bank-Owned Mortgage Insurance, you may not always be covered
- Your insurance covers only your mortgage balance. Even though your mortgage debt reduces over time, your premiums remain constant.
- If you die, only the outstanding balance on your mortgage is paid directly to the Bank/Trust company.
- If you take your mortgage to another lender, you will lose your existing mortgage insurance and will be required to re-qualify for new coverage.
- You lose all your coverage when your mortgage is: repaid, assumed, or in default
- You have no flexibility to change your coverage as your needs change.
- Medical underwriting is done at the time of the claim, which can leave a grey area to refuse paying a claim.
- Typical mortgage life insurance rates are not guaranteed.
With Individually-Owned Mortgage Life Insurance You Are Always Covered
- You own the policy and choose the beneficiary(s) you want.
- Your rates are guaranteed for the life of the policy contract.
- Your coverage amount doesn't reduce as your mortgage balance decreases.
- Your mortgage protection remains intact even if you switch lenders.
- The sale of your property has no effect on your coverage. Your policy is portable and is not directly linked to your current lender. You do not have to re-apply if you transfer your mortgage.
- You can match the term length to your amortization period.
- You will have the option of converting your policy, regardless of your health.
- Full underwriting is done at the time of application.
Of course, life insurance is not the only aspect of risk management that needs to be considered regarding your mortgage. Ensure you have adequate disability and critical illness coverage in case of health issues will complete the picture. A discussion with your Scrivens advisor is the first step to the right solution for you.
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