“Did I need to take the insurance the bank sold me when I got my mortgage? Do I need mortgage insurance at all?” C.P. wrote and asked.
I’m often asked this and the answer is usually the same: That depends. As with all financial planning questions, no one answer fits every situation.
The simple answer in this case is No. You don’t have to take the life insurance the bank or mortgage broker offers you. You have the right to refuse and you can check off the box that says you don’t accept the insurance. Based on that, they can’t refuse to give you a mortgage.
The answer to the second part of the question depends on if you have financial obligations that couldn’t be met if you passed away. If you died, does someone need to continue to live in the house that’s mortgaged, and can they afford the mortgage on their own or would the house be sold?
There are several excellent life insurance needs calculators online that can help you determine this.
But the fact that you don’t have to take it doesn’t mean you shouldn’t look at mortgage insurance. Sometimes saying Yes at the time is a good short-term solution until you can look at all your options. Most bank insurance can be cancelled at any time, but be sure to ask to be sure before you take it. Or, better yet, talk to your financial planner or insurance adviser before you apply for the mortgage to determine if you have a need.
There are two primary types of mortgage insurance.
The most common and easiest to get is the insurance the bank or mortgage broker offers when you apply for your mortgage. This is often a fixed amount based on your age and the amount of the mortgage. As you reduce your outstanding mortgage balance, often your premium stays the same even though you’re getting less coverage.
And with this type of mortgage insurance, the benefit goes directly to the lender and not to your family should you have a claim. While this may not be an issue, it could be depending on your situation at the time.
With any insurance, be sure to read the fine print to determine if there are any situations under which they might not have to pay your beneficiaries. With bank mortgage insurance, there often are.
If you need mortgage insurance, you might also need an income replacement. Paying off your mortgage may give your family a place to live, but they still need money to pay property taxes, upkeep, utilities and to put food on the table. If you need income replacement as well as mortgage insurance, it’s cheaper to increase the amount of coverage you have under one plan than it is to buy separate plans.
Bank mortgage insurance can’t be greater than the amount of the mortgage, so it won’t work for income replacement.
If you already have a term or permanent insurance plan, increasing the amount of coverage or adding a rider is often less expensive than the bank plan.
Also with a personal plan, your beneficiary controls what happens to the proceeds. If they decide they don’t wish to pay off the mortgage, they don’t have to.
Once you complete a needs analysis and determine the amount of coverage required for your short-term needs, such as mortgage insurance or income replacement, you’re likely best to stick to a personal pure term insurance policy. Purchase the amount of coverage required versus the amount of permanent coverage you can afford.
As your financial situation changes, you can look at the other uses for life insurance in your personal financial plan.
Bill Green is an hourly financial and estate planner, public speaker and author of The Success Tax Shuffle. Bill has more than 26 years of experience in the financial services industry.
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