Importance of Having Life Insurance over Mortgage Insurance

2 years ago
Photo by "Pictures of Money" on Flickr

What is life insurance? The video defines the purpose of life insurance and its purpose.

Now you have successfully purchased your dream home for your family and living in a lifestyle that you always dream off. Lovely family, beautiful children and stable jobs to secure your financial needs. Then you start to wonder what’s next? You question yourself, how do you guarantee and secure the future of your children? Will they have a proper education and be able to continue the same lifestyle they have now should anything unthinkable were to happen to you as a bread whiner?

These are one of the most common question everyone dreaded and perhaps the question we try not to think about. Wether we like it or not our time will expire one way or another. But the real question needed to be answer is will it be too fast or too soon that we don’t have a chance to give our love ones time to prepare?

I’d like you to consider the following question…

  1. Will your children be able to attain a higher education and still continue the same lifestyle they have now in the event that your income was cut off?
  2. What type of lifestyle do you have now? Is it the same lifestyle you want your love ones to have or better?
  3. Are you healthy? Are you prone to sickness? Do you live in a fast lane with bad habits (drugs, alcohol, tobacco use?)
  4. Could you stand seeing your love ones downgrade their lifestyle due to uncertainty?
  5. Most important question..if you have the choice would you do something about it?

As a realtor and a real estate advisor part of my job is to educate home buyers/owners about protecting their biggest investment by providing a straight to the heart advice, an awareness to the reality and a prevention to any inevitable loss.

Life Insurance. How educated are you when it comes to life insurance or some people call it life assurance? Unfortunately, most people associate life insurance as just an extra expense, pyramid scheme or sales people knocking at your door selling an insurance policy for a quick commission. Those days are long gone! I’m sure by now you are now familiar with economic downturn, uncertainty and familiar with the term economic word “bailout!”

What is Life Insurance?

Life Insurance are meant to replace or offset an income loss should an unforeseen and catastrophic things were to happen such as disability, illness, injuries or death. Life insurance is in place as an assurance of the enjoyment of a normal day-to-day life should unforeseen or unthinkable things were to happen and caused a loss of income. Just like a concept of a bailing out a company they need an income stream to be able to continue on with a current business!

Some people may argue what about Mortgage Insurance? I have a mortgage insurance what is the difference?

Believe it or not a mortgage insurance are meant to protect the bank (lending institution) and not to protect you. Mortgage insurance is an assurance by you to the bank (lending institution) that you will repay your mortgage entirely if anything happens to you and you can no longer pay back your debt.

You don’t believe me? Let me give you a quick example of the difference between the two. As an example:

Let’s say you took out a mortgage of $500,000 amortization of 25 years. For the sake of this example let’s pretend you are paying $40,000 annually towards your mortgage.

Year1: $40,000

Year2: $40,000

Year3: $40,000

Year4: $40,000

Year5: $40,000

Total payment accumulated on year 5: $200,000

In five years you had accumulated and paid an amount of $200,000 against your $500,000 mortgage and therefore your outstanding balance owing is $300,000.

Let’s say for an argument you have chosen a “mortgage insurance” for a sake of an argument, in this example you passed away on your 5th year of your mortgage term. The bank (lending institution) who assured you of your mortgage will only have to pay the remaining balance of the mortgage owed which is $300,000.

Quantitative Analysis:

$500,000 – $200,000 = $300,000

You ask yourself a question is this a good deal? Certainly not! Because if you were to take on a separate life insurance policy using the above example you are entitled to a $500,000 coverage regardless if you passed away on day one or year 5 of a policy. A $200,000 using the above example is considerably huge amount of money that your children can use for their education purposes or to taken care of any other financial obligation.

Another thing to consider when choosing a mortgage insurance over life insurance is how accessible a policy is when it is needed. The advantages about choosing a mortgage insurance over life insurance is it is easy to acquire and doesn’t need a lot of requirement to qualify for. It is also cheaper in most cases compare to life insurance policy. But don’t get fooled by the convenience and cost! The whole point of having insurance policy is to have access to it when it is needed.

It sometimes to your advantage to pay a little more and to go through rigorous background checkup prior to acquiring a life insurance policy. I say this because if you make a mistake on the application form when filling up an insurance document you could easily be denied of a coverage. For example, let say you declare on the application a non smoker and you happen to die in lung cancer causing tobacco use the insurance company may simply deny your claim. In the insurance point of view you are a smoker if you smoke one cigarette a year. I will say this again, you are a smoker if you smoke one cigarette a year and yes they have the ability to trace nicotine in your body.

On the other hand when you are applying for a life insurance policy, the insurance provider will most likely require you to be subjected to a stringent blood, urine or even sometimes fitness testing. Depending on the result of the test will determine how much premium you will need to pay for your insurance policy. In other words once you are approved by an insurance provider you are entitled to your policy and have access to claim when it is needed.

There are different flavours of life insurance policy. Term, Whole Life or Universal policy and these policy serves different purpose. Just like buying a car not all car are made for the same purpose. Some are built for speed some are built for comfort. So it is important to know which is the right policy for your needs. You can do this by consulting a licensed life insurance agent. I will post a follow-up blog on different types of life insurance policy out there and their purpose on my next blog. So stay tuned…

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