When my wife and I bought our first house, our bank offered us mortgage insurance. It sounded like a good idea. We had never purchased insurance before or even thought that much about it. But we thought about the consequences of either of us passing away unexpectedly and agreed that it was a worthwhile precaution. And it seemed like a good deal. We were young and the cost seemed quite reasonable.
As I look back now though, after many years as a financial advisor, I see things somewhat differently.
While the monthly premium may in fact have been reasonable, it was by no means cheap when you consider how much interest you could save if you applied that extra amount directly to your mortgage.
Don’t get me wrong — I still think it is important to have insurance if you have a mortgage.
But I also believe that it is worthwhile to consider alternatives.
What I now know is that there is a better way: rather than bank mortgage insurance, consider buying your own insurance.
In addition to potentially saving you money, there is the issue of what would be covered in the event of your death. In the initial years of the mortgage, the benefit would be substantial as it would cover the entire outstanding balance of the mortgage. But over time, any potential payout would diminish as the mortgage balance decreases.
There are additional factors to consider with respect to bank mortgage insurance: premiums go up with age; the amount of the insurance may be inadequate (especially for families); the bank is the beneficiary of the policy (rather than your spouse, for example); and in the event of moving your mortgage to another institution, you lose coverage and possibly the ability to be covered (if there are health problems).
Today I rarely recommend bank mortgage insurance to my clients.
Instead I help them determine their overall need for insurance and recommend that they buy their own.
There are many advantages: you can choose the amount; you can lock in the premiums for a specified term or even indefinitely; you can choose a beneficiary rather than everything going to the bank to cover off the mortgage; it often works out to be less costly; there is no need to change anything should you decide to refinance with a different institution; and there is flexibility should your insurance needs change (i.e. estate planning).
There are many different options available including term-10, term-20, or permanent. Chances are, with the help of an insurance advisor, you will be able to find something that is suitable for you.
When you combine the potential savings with the advantages of other debt reduction strategies, you might be surprised at how much sooner you can get out of debt.
If this topic is of interest, please call or email to pre-register for our upcoming presentation entitled “Peace of Mind through Debt Reduction”. Date and location to be determined.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund. For more information feel free to call Jim at (250) 594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.
