Safety Net
By on Apr 18, 2008
By Gary Opolsky
When you, or you and your partner, take out a mortgage to finance a home, ask yourself this basic question: "How will we pay off this property if either of us, for watever reason cannot make the payments."
It's a fact that a mortgage is a loan that must be repaid. And it's a sad fact that individual circumstances such as illness, long-term disability or worse, death, could factor into your ability to make that payment. But if you are cautious, and ask yourself the above question, then you will discover methods available to financially protect your family should the inconceivable occur.
The possibility of an illness or long-term disability is real. According to the American Cancer Society, men have a one in two, and women a one in three, lifetime risk of developing cancer. Typically the age group most likely to be affected by illness are those between 40 and 50 years. Currently, there exists a special type of insurance called ?Critical Illness? which will pay a tax-free, lump sum to a person with one of a number of major illnesses, provided the individual survive a certain period of time. Generally, a client will buy a policy that will at least pay off the mortgage.
For those who are employed by a company, long-term disability may be part of one's benefits package. Be sure to read your benefits? booklet carefully to establish this. As for someone who is self-employed and without any type of income protection, they would be well advised to obtain theirs independently. A variety of insurance policies exist that can help even self-employed individuals weather an illness; seek the advice of an insurance professional to help decide if you have the right coverage.
You might be surprised to learn that finding financial protection in the case of death is relatively inexpensive. Let's use as an example a married couple: the male is 42 and the female is 38, and the fixed monthly cost of a bank life insured mortgage of $300,000 would be $135 per month. Bank insurance always equals the mortgage, and as time passes, the insurance is reduced. Should one of the partners pass away, the bank pays off the outstanding principal and the insurance policy is terminated.
Or, consider this as an alternative. Set up your own life insurance policy with guidance from an insurance advisor. There are a multitude of plans to choose from. The monthly premium for the same policy as above, assuming both are non-smokers, would be about $50 to $60 per month. This is for a policy that covers each person. This means that upon the death of one spouse, the survivor has a policy of $300,000 to keep, reduce, or cancel.
In fact building your own insurance policy for your mortgage can be beneficial for many reasons.
The cost is about 50 per cent less than bank mortgage insurance.
The insurance remains level. For example, the mortgage has been reduced to $150,000 from $300,000. If you pass away, your spouse stands to receive $300,000. That amount would effectively pay off the $150,000, and still leave $150,000 behind for the surviving partner. The bank insurance would pay off the mortgage only.
Flexibility. When your mortgage renews, you may wish to change banks for a better rate. If you have your own policy you will not have to re-qualify for insurance at a higher premium due to your advanced age. If your health has deteriorated you do not have to worry about re-qualifying medically because your policy is independent and guaranteed.
Protection retention. If you have paid down your mortgage, the bank insurance terminates. With your own policy you could retain the life insurance. You may need to provide financial support for a child, spouse, or grandchild long after your death. In that case you can choose to convert the policy to permanent insurance, another thing not available with bank insurance.
When purchasing a home or condo, protecting your investment is a priority. An individually owned policy can offer you and your loved ones optimum control should the unexpected occur. Think carefully about it and be prepared. Discuss these concerns with first your family and then get assistance from a professional insurance advisor who can help you analyze your needs and provide you with options tailored for your budget.
Gary Opolsky, MBA, has been an independent insurance advisor since 1982. He has helped over 1,000 families protect themselves financially in case of illness or death. He can be reached at 416-636-4411 or gopolsky@gsoinsurance.com.
