First Financial Group is pleased to provide our first newsletter of the new year – we wish all our readers the best for a happy and prosperous 2013!!
Why you should buy term or permanent insurance instead of “mortgage insurance”
The purpose of purchasing mortgage insurance is to protect your family in the event of your untimely passing. The proceeds from the insurance pays off the balance of your mortgage, leaving your spouse and family mortgage-free, with the ability to focus on other major living expenses moving forward. However, there are a number of things one should take into consideration before making that decision. Mortgage insurance is extremely constricting. Here is why it is always wiser to purchase personal Term or permanent (premiums guaranteed for life) life insurance.
When you pass away, if you have mortgage insurance, the proceeds are ultimately paid to the bank to clear whatever your current balance is at that time. That means that in all likelihood, the amount paid out is far less than it was when you originally purchased it. If you had purchased insurance yourself through your trusted advisor, the full amount of insurance proceeds would be paid to your family tax-free, and then your spouse can decide how to deploy the funds. In addition, when you purchase insurance yourself, the premiums costs are guaranteed for the life of the contract. When you buy mortgage insurance, the premiums could fluctuate by the carrier, which means, the amount of insurance will shrink (as you pay off the principal) but the premiums won`t shrink with it! The result is more expensive insurance for the consumer.
When purchasing insurance, one of the most important factors is underwriting. This is how the insurance company calculates the cost of your insurance. The underwriting process for term or permanent insurance is much different than that of mortgage insurance. Mortgage insurance is generally treated like a group plan. The bank groups you together with all the other insurance purchasers and you wind up paying the same average amount as everyone else in your age category. They don`t take into consideration your good health, which should typically provide you the benefit of paying less premium. For example, a 45 year old man in good health could obtain $500,000 of Term-10 insurance ( guaranteed premium for 10 years) for $54/month. The same man could get $500,000 of Term-20 (guaranteed premium for 20 years) for $89/month. However the same amount of “mortgage insurance” would cost that purchaser $135/month.
Another major flaw with mortgage insurance is its lack of flexibility. When you purchase mortgage insurance, it covers the insured only on the property its purchased for. So, for example, should you decide to sell your home and move, you will have to re-apply for insurance on your new property. The results are that you are now older, and therefore the insurance will cost you considerably more. Had you bought insurance through your advisor, your premiums remain the same for the length of the contract, regardless of where you live or if you should decide to move!
Mortgage insurance is sold by bank employees who may not be educated in all financial fields. These are just a few reasons why you should always consult your trusted advisor who will be able to explain the intricacies of the products you may require.