By Mike Onotsky
If you own your own home, you have had a conversation about Mortgage Insurance before. When you walked into the bank to negotiate your mortgage, one of the points of discussion was around covering your mortgage balance should you pass away before the mortgage is paid off. Unless the survivor earns all of the household income or, at the very least, does not wish to make mortgage payments should they outlive you, you will need some amount of life insurance coverage to pay out this debt to ease the burden on your survivor and ensure they can stay in the same home should they choose to do so.
How Mortgage Insurance Works
Did you know, however, that even though the payments on your mortgage insurance through the bank stay constant, the amount they pay out on decreases with the balance owing on your mortgage? If your mortgage was $200,000 when you first took it out and the insurance payment was $200 a month, in future years when the balance owing is $100,000, your insurance payment is still $200 a month.
In addition to the above, this insurance is only designed to pay out the mortgage. What if you need coverage for other purposes? Most people look only to cover the mortgage balance. The reality, however, is that there is usually a far bigger need to cover an income gap where a couple is concerned.
Let's Look at a Real Life Example of Household Expenses
Imagine a couple where spouse A earns $70,000 a year after tax and spouse B earns $30,000 a year after tax. Let’s assume they are 20 years until retirement. Let’s also assume that they calculate that a survivor, should one of them pass away before retirement (and earned income stops), the other will need about 70% of the couple’s joint income to maintain the same standard of living (this represents an often used percentage that advisors will use in these types of calculations).
In this example, the total annual household after tax income equals $100,000 x the 70% factor, and you calculate that the survivor should have approximately $70,000 in after tax income. Spouse A will have sufficient income, therefore, spouse B does not really need any coverage for income purposes. On the other hand, spouse B would have a $40,000 a year gap. Multiply this times 20 years and we calculate that spouse A should have $800,000 of insurance on themselves to cover an income gap for spouse B. Since this number would decrease as you head towards retirement, there are a few ways to ladder this coverage in order to keep costs down but ensure there is sufficient coverage at all times. Of course, mortgage coverage would be added to this if desired.
Is Your Financial Advisor Life Licensed?
One of the issues at play here is that financial advisors in the banks are usually not life insurance licensed. Bank provided mortgage insurance sales are not regulated and, therefore, anyone in a sales role at the banks can sign you up for this coverage. Only a licensed insurance advisor, on the other hand, is trained and equipped to determine the right amount of coverage for you and all of your needs. They will look, not just to the mortgage, but to all aspects of risk as it pertains to you and your partner if needed. In fact, life insurance advisors MUST provide documented evidence that they have done their due diligence in providing the right advice for each and every client.
The scope of the discussion with a licensed insurance advisor goes much deeper. These advisors will also look at your risk as it pertains to covering your bills and payments should you suffer a disability preventing you from earning income. The reality is that, throughout your working life, you are 3.5 times more likely to be injured and require disability insurance than you are to die. Disability coverage (through work or individually) should be discussed just as much as life insurance and an insurance advisor is the only one who can truly decipher that group benefits booklet you have with all of the foreign language about short and long term disability coverages.
What I have not mentioned prior to this is that, most often, individual insurance coverage is less costly than mortgage insurance, mainly due to the underwriting process.
Get the Advice from an Experienced Financial Advisor
The bottom line is that if you can get a better product, based on knowledgeable advice, and for less money, is it not worth chatting with a licensed life insurance advisor? Give us a call today for a friendly, no obligation and no pressure conversation that will help you find the right insurance solution for your needs.
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Thanks for reading.
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