Is Mortgage Insurance a Bad Idea?

mortgage insurance

People with homes deserve a standing ovation, whether it’s a two-room house or a mansion. The prospect of a new home is exciting, but when you meet the paperwork and a ton of complex-termed documents, you can be overwhelmed if you were unprepared.

In this discussion, we’ll assume that you are taking a mortgage for a house. Banks will hurriedly serve you the mortgage papers without giving advice on what to do—apart from showing you where to put a signature. Among the many checkboxes in your mortgage papers is mortgage insurance. The broker will do their best to convince you that you should check this box and sign it because it’s good for you. But is it?

Contracts are already stressful enough, let alone mortgage insurance papers. Below are some mortgage insurance terms explained so you can better understand what you are signing up for. 

Mortgage Insurance Terminology

Underwriting

Underwriting is the process of determining if you qualify for mortgage insurance. If you do, then the cost of your insurance will be determined by your age, pre-existing conditions, your current state of health, and your activities. In this case, you’re assured of coverage as long as you carry out your premium payments and, as stipulated, the policy will pay out. Keep an eye out for banks that insist on “post-claim underwriting”, which means they only determine if you qualify after you make a claim. At this point, they can simply say that you don’t qualify and therefore not pay you.

Consolidation of Coverage

Multiple plans mean more money on overhead and fees. Banks only help you cover your mortgage. If you have other insurance needs, you will require different policies. However, if you choose private term life insurance, it can cover multiple insurance needs in one policy, including education, childcare, mortgage, etc.

Premiums

There is a standard cost for mortgage insurance premium. You won’t be given a better deal because you are healthy or don’t participate in “risky”€ activities. That being said, with a traditional term policy, you will be given lower premiums for your life insurance while maintaining the value of the policy. The bank, on the other hand, will reduce the value of your life insurance benefit as you clear your mortgage, which means you will have declining benefit for the same price of insurance.

Need Analysis

You may be having partial or sufficient coverage for your mortgage if you have a life insurance at hand. An insurance adviser will perform a need analysis to determine this, which is something the mortgage lender won’t be bothered with and will instead cover the full amount of the mortgage.

Portability

A term-life policy works autonomously, which means it will cover you without any considerations on who you have taken the mortgage from. With the bank, your mortgage insurance goes hand-in-hand with the mortgage. If at renewal, you change your mortgage lender or if you purchase another home, you will be forced to take out another insurance.

Beneficiary and Flexibility

The bank is the main beneficiary with any mortgage insurance. With personal life insurance, you can choose who your beneficiary is and even allow them to decide how to use the money. This flexibility translates to better financial security because the beneficiary can decide if they want to invest the money instead of paying off the mortgage.

When making your insurance decision, you should realize that you don’t just need cover for your mortgage and family, but you also need to protect yourself in case of critical illness or disability as these may hinder your ability to pay off your mortgage. So the amount and type of insurance you have should cover all your needs.

Featured Image: depositphotos/ stokkete

RELATED BY