Life insurance is an important component of a financial plan. Insuring your mortgage makes perfect financial sense – your home is your largest debt in most cases, and if an unexpected death were to occur, you would not want your family to be forced to sell the home you shared.
Many people have mortgage insurance through a bank or lender to protect their family, but a recent conversation I had with a client, outlines the importance of knowing just how “insured” you are. Below is an actual case study, I have changed the names to protect anonymity.
A young couple, “John” and “Judy”, buy a home together, which they share with two young children. They insure the mortgage with their bank (owe approximately $250,000), and the husband has an individual life insurance policy ($100,000) on top of that. They feel they are well insured, protecting the family.
Tragically, John is killed in a car accident leaving behind his family and debt. With so many other things to worry about, Judy at least has the peace of mind that her family can keep their home, while the additional insurance will give her some much needed funds to help over the coming months.
This is what happened – John’s individual insurance pays out fairly quickly like it is supposed to, to the beneficiary on the policy – his mother. He set up the insurance before he was married, but hadn’t reviewed it in many years and had not updated his beneficiary. His mother decides to hold on to the money – she is sure that if the money is released to her daughter in law that Judy will take the kids and move away.
Shortly after that, the bank contacts Judy to let her know that the mortgage insurance coverage is denied. Here is how coverage from a lender works: when you only answer a few questions and are given mortgage insurance, you have not been underwritten. In this case, the bank decides that they would not have insured John if they had underwritten the policy up front. They return the premiums paid and the mortgage is still outstanding.
I share this story to outline two things that should never be an issue at such a difficult time. First of all, have a life insurance policy that is written upfront so that you have a legal contract in case the unexpected happens. Secondly, make sure you are able to specify your beneficiaries (your family, not a bank/lender) and review somewhat regularly with an insurance professional.
One additional thing to keep in mind – life insurance costs less than mortgage insurance in most cases.
Protect your family, not your lender, and do regular reviews. At Ecclestone Financial Group, we can help!