Why you need Individual Life Insurance to Cover your Mortgage
Mortgage insurance is a policy that covers the risk of a defaulted mortgage loan. In the event of the borrower’s death, the policy will settle the mortgage in full. However, many people view mortgage insurance as a big ripoff. This is due to the fact that mortgage insurance decreases in its value as you pay premiums towards paying off your mortgage. Unlike life insurance where the amount of cover does not change as you pay premiums. In other words, the insurance equals the amount outstanding on the repayment mortgage. The termination date of the insurance policy is equal to the date of the final mortgage payment.
Regular life insurance involves the payment of an annual premium for death benefits. There are three types of life insurance and each consists of its own advantages:
- Term life insurance involves the payment of a fixed amount over a specified period of time (term) like 20 years. When this period expires you need to buy another cover under different terms and conditions. If you die within those 20 years, your beneficiaries will receive the death benefit. This insurance product is deemed to be the cheapest of all life insurance products as it only covers you for the length of the term and does contain an investment component as does whole life or permanent insurance.
- Whole life insurance involves the payment of annual premiums for the guaranteed coverage of your entire life. The premiums are high as part of the amount is put into the savings component of the product, which is the cash value. This cash value is tax deferred and can be used to access loan facilities. It can also be surrendered at a future date or converted to a fixed annuity at retirement.
- Universal life insurance is very much like whole life insurance with the only difference being that it offers flexible premium payments and death benefits. This flexibility is its greatest advantage. After a number of years of paying premiums, the cash value would be enough to pay for the death benefit and future premiums.
The clear difference between mortgage insurance and regular life insurance is that after the death of the policy holder mortgage insurance covers the mortgage payments while regular life insurance covers the policy holder and gives death benefits to his beneficiaries. Mortgage insurance protects the lender from the borrower while life insurance protects the family and loved ones in the event of an untimely death.
A Mortgage insurance is a contract between the borrower, the lender and the insurer but life insurance is between the insurer and the insured only. The mortgage insurance premium can be discontinued when the loan to value ratio of the mortgaged house hits the 80% mark but regular life insurance premiums must all be paid as per the initial contract.
Contact Jack Bendahan for more information on the differences between mortgage and life insurance and help you decipher which option is more beneficial to your situation.
