For most of us a mortgage is a very common theme in our lives and if you are one of those few that are mortgage free congratulations. It is also common practice for most people with a mortgage to have taken some sort of steps to insure the mortgage is paid of in case of death. Many of which are using the banks traditional mortgage insurance plan offered at time of home purchase or mortgage renewal. What most people aren’t aware of is how this coverage works and the risks associated with it.
Lets start by looking at how traditional mortgage insurance works. The offer for mortgage insurance usually covers life, disability, and more often than not critical illness coverage. The qualifications for coverage are usually a few questions and your signature while premiums are based on your age. These premiums will usually go up every 4 years or so and become extremely expensive as you age. What is also not explained, is that mortgage insurance is a post claim type of coverage. Simply put, at the time of claim or death the insurance company will decide if you were insurable for this coverage. To put this in further context lets pretend your husband just passed away suddenly. It will be at this time that the insurance company with underwrite and investigate if your husband was even insurable and if they are going to be paying off your mortgage. Even though you have been paying premiums for many years, you are not guaranteed to collect this insurance money.
Lets look even closer at the life insurance component of mortgage insurance. You are now aware that mortgage insurance is post underwritten but what else should you be aware of? Lack of portability of mortgage insurance is another risk to this type of product. Every time you move your mortgage to another lender, it is common that you are required to re-qualify for mortgage insurance. Any new health issues at this time may leave you and your family without the ability to re-qualify for coverage leaving you uninsured.
Disability coverage under mortgage insurance is another area that is very misunderstood as many people don’t take the time to understand how it works. Once again it is a post underwritten product. What is even more important to understand, if you become disabled, you are only covered for the minimum payments of your mortgage for a total of 2 years. In reality, if you do become disabled you are going to need more money than just the mortgage payment to survive. What happens if you become permanently disabled? This type of coverage is not going to pay your mortgage after 2 years and it’s definitely not going to protect your current lifestyle into the future.
The good news is there is a better alternative to mortgage insurance. This coverage is underwritten in advance, meaning that the insurance companies determine if you are insurable before they take your premiums and issue you insurance. For disability insurance there are options available to you to insurance an adequate amount of your income, not just your mortgage payments in case you are disabled. If you are to become permanently disabled there are also options available to be covered to age 65.
When it comes to life insurance this alternative coverage offers extended benefits like portability, guaranteed term of premiums, guaranteed renewability of insurance and convertibility to permanent coverage. In short, once you have coverage in place there is always an option to continue coverage regardless of your health. What is also a great option is you can purchase any amount of coverage not just the amount of your mortgage. As your mortgage is being paid down the death benefit doesn’t decrease like with mortgage insurance. This is great for planning and ensuring your family is financially taken care of if something were to happen to you.
I have to say though the best part of this insurance coverage is that it is usually cheaper and by quite a bit. So I’m saying you can receive better coverage for a better price, there must be a catch? Well yes, the catch is you need to qualify for this coverage first through underwriting. Chances are if you don’t qualify for this type of insurance, then I would be concerned if your traditional mortgage insurance would cover you anyways.
Talk to your Certified Financial Planner to learn how you can save money and ensure your family is properly protected.
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