Utilizing personal life insurance when buying a home

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When buying a home you often require a bank or financial institution to loan you a large amount of money commonly known as, a mortgage. I need to note that I am not a Mortgage Broker; I am a Financial and Life Insurance Advisor.

When finalizing a mortgage, the lender will ask you if you want to add life insurance to your contract. If you pass away, the bank is able to pay off the outstanding debt with the insurance proceeds. 

WHAT'S THE DIFFERENCE?

Personal life insurance can be broadly applied to your debts and obligations whereas insurance tied to one specific loan, only covers that loan. This is a major difference. If you move or sell your property, the insurance contract ends. As the value of your loan decreases, so does the value of the insurance. The price of the insurance does not change although the value of the insurance decreases. The financial lender benefits the most out of this arrangement. 

With Personal life insurance, the benefit amount remains level for the duration of the term, at the same price. As your loans decrease, that allows your loved ones to use the additional funds for other purposes. 

Again, while loan insurance is tied to that specific loan; personal life insurance is tied to the individual.

Who is the beneficiary at the bank? 

A very major difference between Personal Life Insurance and Mortgage Insurance is that the bank is the beneficiary of the Mortgage Insurance policy. If you pass away, the bank is repaid. This allows your loved ones to fully own the asset, however, if you the loan was close to being re-paid, there would be no surplus going to your loved ones.

Is it easier to qualify for Mortgage Insurance?

Short answer, yes. The lender at the financial institution is able to go through an easier application process because loan insurance is considered a group policy. The risk of you passing away is spread out over a large group of people, which allows the lender to keep premiums low.

The one conundrum is that while you may answer a few yes/no questions, the claim is underwritten at time of death. Major financial institutions have made news headlines where death claims were not paid out because the applicant did not answer the yes/no questions appropriately.

How is Personal Term Life Insurance underwritten?

Qualifying for a term life insurance policy depends on your age, personal and family health history, smoking status and lifestyle. There is a more extensive application upfront but then you are fully underwritten. This may only require a telephone interview but may require a report from your family doctor. Once the insurer accepts the application, as long as the premiums are paid and provisions are complied with, the claims process is fast; there is a legal obligation for the life insurance company to pay out your full proceeds within 30 days. 

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A Personal Term Insurance Policy is an affordable policy you can purchase but offers extensive peace of mind. 

Most importantly who would you rather have as the beneficiary of your policy: the bank, who is already collecting interest off of your loan, or your loved ones? 

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Is a Term Life Insurance more expensive?

Premiums are very comparable and in some cases, less expensive for an Insured to buy a Personal Term Life Insurance policy. The main difference remains that the benefit amount stays level and does not decrease. This gives the beneficiaries of the policy more options and flexibility to use the money as required. 

Any other differences?

Insurance policies on a loan (through the bank) offer a 30 day “free look” where a Personal Life Insurance policy offers a 10 day “free look”. 

Personal life insurance can work for you today and also be flexible to your changing needs. There are also renewal guarantees and conversion options available to make a part or all of your policy available for life.

Concluding Thoughts:

A personal life insurance policy is more encompassing of your overall needs. You are able to look at all of your debts and determine an amount that would satisfy your obligations without a heavy price tag. This can also include needs of young children, inheritance planning, estate planning, etc. While insurance on a mortgage is specific to the mortgage, personal life insurance takes a wider lens. 

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