Congratulations!! You have bought a house and are signing off all of the final paperwork. Your bank has mentioned mortgage insurance to you, explaining that if something happens to you, it will ensure your mortgage gets paid off so that your family is not homeless. Makes 100% sense. After all, if something happens, we want our families to be able to maintain their lifestyle and be safe. Sign me up!! Right?
Let’s start with the basics. The rate you will pay for your mortgage insurance will remain the same throughout the time frame of your mortgage. Your amortization period may be 10 years or 25 years or perhaps even 30 years. So based on a mortgage amount of $250,000. 00, you and your spouse being in the 30- 35 age range, your mortgage insurance will, on average, cost you approximately $55.00 / month. With each payment you make, the amount you owe on your mortgage goes down, small amounts at first, a little more as time goes by.
So, scenario one, 4 years into your mortgage, you now owe $220,000.00 (based on monthly payments plus extra payments made occasionally from your tax refund, etc). Your spouse, who is a smoker, dies of a heart attack. You now have a young child and anxiously wait for the insurance to pay off the house so that your unexpected struggles can be relieved. The insurance representative contacts you and asks questions about your spouse’s death. You answer freely so as to move the process along. Weeks later, you receive a letter in the mail saying that the insurance will not be paid out as your spouse’s risk factors (smoker) plus dying as a result of a smoker’s related disease, your safety net turns out not to have been quite so safe after all.
Scenario two. Your spouse has no major risk factors and dies in a not at fault car accident. The insurance is paid out many weeks after the passing of your spouse, directly to the bank. You were paying for insurance of $250,000, owe only $220,000, so you assume you will get the balance of $30,000. 00 which will help cover funeral and other minor expenses. Unfortunately you are wrong and will not see the difference.
So what happened? At the worst time of your life, you do not want to have to deal with these problems and expenses. Let’s start with the important things you need to know before buying mortgage insurance. It is always underwritten after death. This means that the medical questions and risk factors are not calculated when you the purchase the insurance. They will all be investigated however, with close scrutiny, after you die. So if you have a risky lifestyle in either your activities (extreme sports etc) or lifestyle (obese, smoker, etc) the claim is likely to be turned down. Furthermore, no matter how little is left on your mortgage, the bank is the one that gets paid and ONLY for the amount owing on the mortgage.
What are your options? Life insurance, whether Term or Permanent (these will be discussed in my next blog), will be underwritten prior to acceptance and will remain in place for the full amount ($250,000) and will be paid directly to your beneficiary (spouse, children). If your mortgage amount is down to $220,000.00, you will be able to pay off the mortgage, pay for the funeral and have a little left over for other immediate expenses. The cost will vary based on what type of insurance you purchase, your age and risk factors, however it will often be in the same range as your mortgage insurance payments.
The bank / lender, will never tell you these details and will never disclose to you the refusal rate on mortgage insurance claims. Get in touch with me to discuss your options. Let me help you take care of those you care about the most.
Write to me at myfuture@unleashtheknow.com. Protect your family even when you are no longer there to do it in person. Leave them with fond memories instead debts.
This is part three in the I WISH I KNEW THAT THIRTY YEARS AGO series, brought to you by UnLeash the KNOW.
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