Term Insurance to Cover Your Mortgage

Mortgage insurance is creditor insurance where financial institutions offer to pay off the remainder of a mortgage if the mortgagor dies during the term of the mortgage.

Another strategy to achieve this uses personally owned life insurance, which gives you more flexibility insuring your mortgage liability. Compare the mortgage insurance your bank or financial institution uses for your mortgage creditor life insurance with buying your own personally owned term insurance.

Mortgage Life Insurance from the financial institution

• Premiums can be much higher
• The death benefit replaces only the remaining balance of your mortgage balance
• Premiums do not reduce when your mortgage debt is reduced
• The death benefit only pays off your remaining mortgage debt
• The contract stipulates that the financial institution is the only life insurance beneficiary
• You cannot alter the irrevocable beneficiary of the contract
• The entire amount of life insurance is lost upon mortgage repayment, or when in default
• The mortgage life insurance is not transferable to another financial institution or private lender
• When you move your mortgage to another firm, you generally lose the coverage issued from an existing institution. If you have health concerns you may not be able to buy more coverage
• Because so few health questions are required, underwriting is often done at time of claim, resulting in denied claims.

Creditor insurance may cover two parties who jointly mortgage their property. However, it pays only on the first death, even if the two were to die. When one spouse dies, creditor insurance no longer covers any survivors. In contrast, by owning your own insurance policy, two spouses or partners may each own separate life insurance death benefits. In the case where both parties die, double the benefit would be paid, thus adding increased value to the estate. If one survives, the coverage on that life continues.

Your own Term Insurance

• You can set up multiple beneficiaries, including a fund to pay off some or all of your mortgage debt.
• Beneficiaries can choose to not pay off the mortgage if they prefer to pay off higher interest debt
• You can add or revoke beneficiaries.
• Your life insurance face benefit amount does not shrink with a reducing mortgage debt, and can actually increase with some plans. Your coverage level is controlled by you.
• Most term plans are convertible to permanent plans, without a medical exam, even if your health declines.
• You needn't qualify for new mortgage life insurance if you move your mortgage to a new financial institution. You just continue using your existing term plan, which covers you regardless where your mortgage is.
• Once your mortgage is repaid or reduced, you will have life insurance to cover other liabilities or for other estate planning purposes.
• Personally owned life insurance can normally be converted to permanent insurance for the same or a lesser amount.
• In most cases, you can reduce your coverage over time to ensure the proceeds pay your final expenses, removing financial burden from your loved ones.
• Term insurance allows you to buy coverage applicable to your entire capital needs, in the event of death.
• A custom life insurance plan often offers other optional benefits, such as riders that can include: life insurance coverage for children, an investment feature with tax advantages, disability coverage, critical illness coverage, or a bundled mixture of term and permanent life insurance.
• Many plans offer level premiums for longer periods, and some life insurance plans can be prepaid.
• You have more control over the cost of premiums, which can go up over time if you don't own and control the life insurance contract.
• Your insurer underwrites your policy when you apply for it. Other mortgage life insurance from a financial institution offers you little control and may choose to underwrite your health history at claim time.

Ask your advisor how to shift out of mortgage life insurance into personally owned life insurance to achieve the above advantages.

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