The Benefit of Hindsight, Now

The Benefit of Hindsight, Now

So you’ve just bought a new home, you’re feeling good … no, you’re feeling GREAT.

See you later condo life!

More rooms, a bigger kitchen where you and your significant other won’t constantly be knocking into each other, bigger closets, a backyard?! And finally, FINALLY some storage space so you don’t have to drive to and from your parent’s house with all your crap!

(Yes, you guessed right, I’m describing my life)

Anyway, you go and see your mortgage specialist to finalize the paperwork. The specialist recommends purchasing mortgage insurance, which covers your entire mortgage in the event you or your partner unexpectedly dies. Seeing as this protection is a fraction of your monthly mortgage cost you agree without hesitation. I mean, the last thing you want is to leave your spouse with a substantial amount of debt if you died (and vice versa).

A few years go by, you notice your mortgage is decreasing but your mortgage insurance premium stays the same.

“This must be a mistake,” you say scratching your head.

(1) You call the mortgage specialist and he/she says, “This is not a mistake, your premium is constant during the term of your policy but will reset when your term renews to reflect your new mortgage balance.”

OK… well, you figure, “my mortgage has a 5-year fixed term, when it renews my mortgage will be less meaning my premium will be less.”

Five years pass, you’re really excited (sarcasm) to see what your new mortgage insurance premium will be. BOOM, like a ton of bricks to the face you get blindsided, your premium has INCREASED.

(2) You call your specialist and ask what gives? “Well, yes, your mortgage has decreased but you’re 5 years older now!”

You’re perplexed but… “it is what it is,” you think.

A few years later, after you and your spouse have tested the waters of marriage and conclude smooth sailing, you collectively decide it’s time for kids.

“We’ll start with one and see how it goes,” you both agree.

Nine months go by… twins.

You’re on paternity leave, at home with the kids – one is climbing all over you while the other is doodling on the walls.

Suddenly, you have an epiphany and think, “If my spouse dies tomorrow, where is our household income going to come from? It’s great that our mortgage will be paid off, but I’d rather take portion of those proceeds and use it as income replacement.”

Once again, you call your specialist and ask, “Since my spouse and I are paying the premium can we decide who receives the funds?”

(3) The specialist replies, “Don’t be silly! With mortgage insurance we are the owner and beneficiary, the proceeds are solely used to pay off the mortgage.”

(4) You hang up the phone, pick up the newspaper and see an article titled ‘Mortgage insurance claim denied.’ A blessing in disguise, as this is the catalyst you needed to finally be proactive in searching for an alternative to mortgage insurance.

——–

Life insurance pays a tax-free benefit in the event of your death so that your beneficiary will be OK financially. The idea is similar mortgage insurance except (numbers below correspond to numbers above):

(1) With life insurance your coverage and premium remain constant throughout the term of the policy.

(2) The cost of life insurance is less than mortgage insurance. As an example, a 30-year old male who purchases a 20-year term $500,000 life insurance policy would pay $36/month for 20 years. $500,000 of mortgage insurance for a 30-year old male is $65/month which is subject to change when your mortgage term ends.

(3) With a life insurance policy, you are the owner of the policy and therefore get to choose who the beneficiary is. Further, the beneficiary gets to decide how he/she would like to use the proceeds.

(4) Applying for life insurance is a process as most of the time medical underwriting is a requirement. This is a GOOD thing. The life insurance company approves your policy knowing what your health is in advance. With mortgage insurance you are underwritten at death, which means, at times the benefit is not paid out.

Now that you’ve sorted out a more efficient way to ensure your family will be taken care of financially if you pass away unexpectedly, you dive in head first to learn more about financial planning.

Surfing the ol’ google you come across an article titled ‘Einstein’s Eighth Wonder of the World.’

To be continued…

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