ARE THEY AN APPROPRIATE ESTATE PLANNING TOOL FOR YOUR REAL ESTATE INVESTMENT?
When purchasing a home, most buyers require a mortgage to finance the purchase. In the midst of all the paperwork and information a bank requires to approve a mortgage, they will often offer life insurance through the bank—insurance that promises to pay off the balance of the mortgage should something happen to you or any other person on the mortgage with you. The cost seems pretty reasonable, they only ask you a few questions on the application and the idea of insurance is reassuring—so should you go for it?
There are a few reasons why taking the life insurance offered through the bank may not be the best choice for you. First of all, the premiums you pay for this insurance will stay the same throughout the duration of the mortgage, but the amount the bank has to pay out in the event that something happens to you is always decreasing as you make your payments. Your insurance premiums stay the same but the payout gets smaller every month as you pay down the mortgage. Contrast this with life insurance bought through a broker, for example, term life insurance. The premium will be constant for the term, but so will the payout—if you bought a $100,000 policy, that is what will be paid out in the event of a claim. You may also find that, depending on your health and medical history, privately purchased insurance can be less expensive than the bank’s life insurance for a mortgage.
You should also keep in mind that most life insured mortgage policies are offered through a process known as “post claim underwriting”. This means that when the bank tells you that you qualify for the insurance after answering just a few medical questions, they really mean that you qualify to pay the premiums. Investigation into your medical history and background is only done at the time that you make a claim. It is at that point, when you are relying on the insurance the most, that the company can deny your claim and find that you are ineligible for insurance. If this happens to you, the insurance company does have to return all the premiums you have paid up to that point, but that amount will be infinitesimal in comparison to the payout you would be expecting.
An important part of buying a home is making sure you can pay the mortgage, no matter what, but be sure you do your research into the best insurance option for your situation.
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