Don’t let the bank insure your mortgage

My Dad was smart with his money advice. He wasn’t smart with his own money, but he had some great, theoretical advice he gladly offered up to other people.

Later in his life he got a licence to write mortgages. As I got older, and a little more interested in money matters, we chatted a bit about mortgages. A lot of the tips he offered me I had already grasped: pay more often than monthly if you can; pay a little extra if you can; reduce your amortization period when you renew; negotiate for the lowest interest rate.

I did learn one thing from Dad though, and it’s a lesson I’ve passed on to lots of other friends.

Essentially it’s this:  Don’t let the bank insure your mortgage.

Some banks may insist that you purchase a kind of insurance, like life insurance. In the event of your untimely demise, the principle of the mortgage will be covered. The bank will want their money back. They charge pretty big bucks for this. Often people don’t know they can say no to this, or offer up the bank evidence of other life insurance which would satisfy the debt.

Here’s why you don’t want to get into the insurance business with the bank. Let’s create a fictional couple, Dick and Jane.  Dick and Jane buy a house for $300,000, they have a 20% downpayment of $60,000, and the bank gives them a mortgage for $240,000, for a five year term.  Dick and Jane are in their late twenties, and they have no major health concerns. They’ve signed up for mortgage insurance with the bank.

As they make their regular mortgage payments, they are paying a single amount which includes principle, interest and mortgage insurance.  The rate they are paying for insurance is based on the original amount of the principle, which is $240,000.  As you might expect, four years into their term, Dick and Jane have paid off a respectable amount of principle.  Should something happen to either Dick or Jane – the bank will cover the remaining amount of the principle – let’s say it’s $220,000 by now.  They’ve been paying premiums on $240,000 throughout!

From the moment they make their first mortgage payment, they’re paying mortgage insurance on an amount they no longer owe! Sure, it’s really tiny at first…but why pay for something you’re not receiving? You’re paying the bank money so the bank can get their money if you die.

Sure, your survivor(s) get the house, but there is a better way to get the same result, with more benefits.

The better solution is for Dick and Jane to take out a term life insurance policy that will cover off the amount of the principle.  In this scenario, Dick and Jane would take out $240,000 of term life insurance for the period of the mortgage. The insurance company will assess their health, examine their risk and assign the appropriate fee for insuring that amount. Term life insurance means you carry it for as long as you need it.  Once Dick and Jane have paid off the house, 20 or 25 years down the road, they don’t have to carry this policy any more.

Plus, they’ll have taken out the policy when they’re young and healthy, and their premiums should still reflect that initial lower risk, unless they go back to the insurance company and up the ante based on some other needs.

In this scenario, not only will the premiums be far less, because insurance companies are actually in the insurance business, and have to be competitive, BUT, if something happens to either Dick or Jane, even if they’re only 6 months away from paying off that entire mortgage, the surviving spouse will get the full $240,000. That’s what they paid for, and that’s what the survivor will get.  Now isn’t that a way better deal? The survivor has the choice to continue making regular mortgage payments, or pay off the balance and any penalties and pocket the rest.

Careful, the bank would also like to insure your lines of credit and your credit cards. Don’t let ’em do that either. Take matters into your own hands, pay less and pass along a better benefit to your beneficiaries.

In my case, there is no spouse, but I have two kids. Should I be struck down by the city bus tomorrow, my debts would be passed along to them. Because of Dad’s influence, and a few others, I have a life insurance policy, with a chunk of term life insurance that’s big enough to pay for the house, and cover my other obligations, while still leaving enough for them to have a good chunk of cash to start their lives. It’s really the same thing.

If you’re spring cleaning your finances, and you realize that you’re paying the bank to insure your debts, give them a call and start weighing your options.

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