Michael Baker, MBA
Qube Investment Management
When purchasing a home, a typical insurance product provided by your lender is mortgage life insurance. This insurance will pay the remaining balance of your mortgage should you pass away before fulling paying down your mortgage. By paying off your mortgage with life insurance, you often remove the most significant debt burden a surviving loved one may have.
Many homeowners will purchase the lender’s mortgage life insurance but fail to consider the alternative of buying an equal value term insurance policy. Each type of policy has its benefits, and it is essential to find which is best for your circumstance.
Let’s examine the different benefits between lender mortgage life insurance to term life insurance using a family with a $500,000 home and $400,000 mortgage insurance need who are amortizing the mortgage over 25 years. Their ages are both 34, and they are in good health.
Lender Insurance: The coverage for mortgage insurance will decrease as you pay down the principal owing to your home. The policy would begin with $400,000 coverage and reduce to 0 over the 25-year amortization period. The reasoning behind this is that the policy is used to pay off your house, so the coverage should reduce with the loan balance.
Term Life Insurance: Over the specified term period for your insurance, the coverage remains constant even as your mortgage loan declines. If the family took out a joint first to die Term 25 policy for $400,000 in coverage, this would remain constant throughout the entire 25-year amortization of their mortgage. If a spouse passed at year 20 with 5 years remaining on the mortgage, they could pay the outstanding balance on their mortgage and keep the difference between the mortgage balance and insurance payout.
Lender Insurance: When applying for the lender insurance, rather than going through individual underwriting to determine premiums, the premiums are assessed at a group level. The premiums are based on the makeup of the group as a whole, and not the homebuyers as individuals. As a result, the premiums are often higher than a healthy individual would pay outside of the group. However, the premiums may be lower than individual term insurance if the homebuyer has a health condition, habit, or activity that would rate up to their policy.
Term Life Insurance: Depending on the age and other health factors, underwriting for term insurance will generally result in lower premiums for the same amount and duration of life insurance. One of the benefits term insurance provides when compared to lender insurance is that homebuyers can shop around for the cheapest premium. The lender with the best mortgage rate may not have the best insurance rate. When buying life insurance, it is important to work with an agent who will compare different providers to find you the lowest premiums for the same coverage.
Portability and Control of Beneficiary
Lender Insurance: When taking out the insurance to pay off your mortgage, the lender becomes your beneficiary, and your policy is tied to the lender. If you have a 5-year term on your mortgage and choose to move lenders for a lower rate at renewal, you will need to apply for a new policy with your new lender. Even if your new policy is lower in coverage, the premiums may be higher than you paid previously based on the group rates.
Term Life Insurance: The beneficiary is chosen by you, in a joint first to die term policy, the beneficiary is typically the spouse. The policy is tied to the policy owners. If they choose to move or sell the property, they still have the policy. If they move homes and still have the insurance need of $400,000 the rates will remain what they were at age 34 (their attained age), the same coverage at age 39 would be higher.
In most circumstances Term Life insurance will cost the homebuyer less and provides much more flexibility to the policy owners. If deciding to purchase life insurance to cover a mortgage, make sure to know the options and what fits your particular situation.
Qube Investment Management Inc. (QIM) is a registered portfolio management firm (Alberta & British Columbia), offering a combination of value and ethical investment methodologies. QIM has a mission to make investments matter.
Under various registrations and incorporations, Qube has been offering investment advice for over 20 years. Qube is a growing team of professionals offering an alternative to mass-market investment products. Offering a professionally managed and disciplined investment experience with discretionary portfolio management for those seeking alternatives to mutual funds or brokerage wrap accounts. Qube has assisted business owners and executives with life insurance, pension, investment and tax planning ideas since 2000.