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Finance 101

Term insurance vs. mortgage insurance. A tale of 2 brothers

May 24, 2018

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Term insurance vs. mortgage insurance. A tale of 2 brothers

Finance 101

Buying a home is a big deal. That’s why you really want to be able to trust the people who are helping you. But when your banker or mortgage professional recommends it… just say no to mortgage insurance. Going with individual term insurance instead, you’re consolidating your coverage. A private term life insurance policy lets you do it all:

“Consolidate all your insurance needs (mortgage, income replacement at death, education and childcare etc.) into a single policy. This saves you money on overhead and fees of having multiple plans. With the bank, you can only cover the mortgage and must hold different insurance policies for the rest of your needs.”

And term insurance doesn’t just cover more. It’s cheaper. It gives your beneficiaries a bigger payout. Here are some scenarios to show how it works.

How term insurance covers you better

The saga of Sam and the misery of mortgage insurance

Newly married and with a baby on the way, Sam wants to do the responsible thing for his family.

As he’s purchasing his first home, Sam ticks the box for mortgage insurance on his mortgage application. If for any reason he isn’t around anymore to pay that mortgage, month in and month out, he’ll be secure in the knowledge that his wife and kids won’t be saddled with an intolerable financial burden.

He signs up and starts paying his premiums. Over the years, he notices that the premiums he’s paying don’t change, but the value keeps going down as the mortgage gets smaller. “Hmmm. That doesn’t seem right,” he thinks…

Grudgingly, he keeps paying. After all, what’s the alternative? Maybe he can get a better policy when he renews?

But after paying those premiums for five years, just when he’s ready to renew, he finds that could be more difficult than he thought. At a routine checkup, he discovered he has a pre-existing heart condition. His current mortgage insurer declines to insure him again.

He gets nothing for all the premiums he paid already. And now he needs an alternative provider just to get his mortgage insured. With a pre-existing condition, he has to pay higher premiums. He shrugs… again, what can he do but keep paying?

The years pass. Sam builds his career and grows his family, leading a happy life (aside from those costly premiums!). But at the age of 56, his heart condition flares up. Sam unexpectedly passes, leaving a grieving widow and children who are still in their late teens.

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With bills mounting, Sam’s grieving widow, Winona calls the mortgage insurer to file a claim. And now the mortgage insurance company will check to see if Sam qualified in the first place!

The best case scenario she can see: the company will pay the balance of the mortgage. But if, for whatever reason, they don’t, then all those years of paying premiums were for nothing.

Funeral costs are mounting. Winona needs to pay off Sam’s line of credit… and post-secondary education might just be out of reach for the kids, now. There’s a hard road ahead.

Steve’s story and the happier tale of term insurance 

Now, Steve was Sam’s twin brother. They didn’t just look identical. In many ways, they were a lot alike. They got married and had a family around the same time, and even bought a home the same month of the same year!

But instead of getting mortgage insurance like Sam, Steve did a bit more research and decided that term insurance was the way to go. Even better, since (like his brother) he is in good health and does not smoke, the insurance premiums are cheaper than what he might have paid for mortgage insurance!

Steve comparison shops at a few firms and finds out that he qualifies. That’s great news! Now he knows he’s covered — and not just for the mortgage. His policy covers costs like children’s education, income replacement, line of credit, funeral costs and other debts.

When he finds out about Sam’s pre-existing condition, he realizes there’s a good chance he has it as well. Unfortunately, that is the case.

Fortunately, around the time that Sam is renewing his mortgage insurance, Steve doesn’t have to worry. He took out a 30-year term when he bought his house while he was in his 30s. There is no need to go through an additional approval.

Steve enjoyed a good life, like his brother. But when the time came, he knew his wife Whitney and the kids were taken care of, financially. The insurance company sent a lump sum cheque to Steve’s wife, who could make a decision how to spend the money to best suit her family’s needs.

Whitney feels that the mortgage is not that big of a burden any more and she can handle it on her own. Because she has term insurance, she decides how to use the money. She covers the funeral costs, pays back Steve’s outstanding bills and decides to send her daughter to Yale Law school. Steve may be gone, but he has left a legacy that will carry his family into a brighter future.

We’re your one-stop shop for investing, plus term insurance

As you know, WealthBar clients have unlimited access to our financial advisers because we’re looking out for their whole financial picture. Buying a home is an important part of anyone’s life journey. When you reach that stage, we’re here to help with that, too.

If you’re interested in buying term insurance, we work like a mortgage broker would. We scan most providers to get you the best rate.

This makes us a one-stop shop for your investments and for insurance, taking care of your whole financial picture.

So, work with someone you already trust. Get peace of mind for yourself and your family. Interested in term insurance? Book a call with a financial adviser.

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