Mortgage Insurance: Safe and Secure
To insure or not to insure…that’s really not the question.
Most people with mortgages want the security of an insurance policy to protect against the possibility of one partner dying, leaving the other with a huge and unmanageable debt.
The real question is where that insurance should come from.
You have two choices and both have their particular benefits.
The first choice is to arrange for an insurance policy through the bank or credit union that holds your mortgage. It’s an easy option and one that can be set up at the same time that your mortgage is approved. The advantage of these group style policies is the ease with which they can be organized – you simply fill out a few forms, answer a minimum of health-related questions, and you’re in! No hassle and no doctor’s appointments. Your insurance is linked directly to your mortgage and to your financial institution. The rate will remain the same for the duration of your mortgage, and will not decrease as you pay off your debt. Some institutions will allow you to readjust the monthly premium when there is a significant principal reduction based on your age at the time of application. This is a substantial benefit. One limitation: should the policy owner die, the beneficiary will be the bank or credit union that holds the mortgage and the money will be used only to pay off the mortgage.
Personal mortgage insurance is another means of protecting your investment. Unlike the policies offered by financial institutions, personal mortgage insurance is tied to the individual being insured and can therefore be transferred from one bank or credit union to another should the home owner choose to switch institutions at renewal time. Personal mortgage insurance involves a more complicated application process and may involve a doctor’s examination before a policy can be approved. The upside, however, is that personal mortgage insurance can prove to be significantly less expensive than that which the banks and credit unions provide directly. Another important difference is that, the policy-holder can stipulate a beneficiary, who can, in the event of the policy holder’s death, choose to use the insurance money as he/she sees fit. If the mortgage is at an attractive rate, the beneficiary may choose to keep it in place, and use the insurance payout to handle other debts and expenses. Term insurance policies will have to be renewed after 5, 10 or 20 years resulting in higher premiums if the same coverage is still required at renewal. This could be an issue for mortgages with an amortization greater than the insurance term.
Wish there were a halfway measure? Prefer the simplicity and security of having your mortgage and its insurance all in one place – but hoping for a lower rate and more flexibility regarding payouts in case of death? Some banks and credit unions offer affiliated member service programs that complement, but are separate from, the institutions themselves. These programs can offer the best of both worlds in the mortgage insurance arena. You can enjoy the peace of mind that comes from knowing both your mortgage and its insurance are being handled by affiliated institutions, but that you’re able to take advantage of the flexibility and lower costs that can result from separating the two.
Still have questions? Mortgage insurance is a complex topic. To ensure that you have all the facts clearly in mind before making any significant decisions, make an appointment with your insurance advisor. The more you know the better decisions you’ll be able to make!
(12/31/2004) Brad Giroux - Estate and Insurance Specialist, Niagara MemberCARE