Should I insure my mortgage?
This question is a pretty easy one to answer, which is you should have enough insurance to cover all major debts that you have, including your mortgage, at the least.
Insuring the “bread winners” who are expected to pay the Mortgage needs to be taken into consideration as well (i.e. if both spouses are expected to be contributing to the Mortgage pay down, then they should both be insured to cover their demise). This really should be part of your calculations before you purchase your home, which is cost of life insurance for the Mortgage contributors (and maybe disability insurance too, but I’ll leave that topic alone for now, feel free to chime in if you think that is not worthwhile).
Remember the words of Chris Rock: Bigger and Blacker:
They shouldn’t even call it insurance.
They just should call it ”in case sh*t.”
I give a company some money
in case sh*t happens.
In this case, the “… in case sh*t happens…” is the demise of the income to pay for your Mortgage, so insuring that is a good idea.
So I should buy Mortgage Insurance?
You should buy insurance to mitigate the risk of your Mortgage, yes, but NO! you should not buy the Bank or Loan Company’s Mortgage Insurance service. Now I should be careful here, because I am sure someone has found a lender who has a Debt Insurance service that is not an out and out rip off, but let me point out the factors to take into consideration, and questions to ask:
- Ask your Bank/Loan company how much their insurance vehicle for the debt/mortgage costs.
- Go to an insurance company (in Canada you can even go to the Insurance company associated with the bank), ask them how much it would cost for a rolling 5 year term insurance policy for the amount owing on your mortgage.
- Most times the term insurance will be cheaper (if not every time), so this is the first reason not to buy your lender’s mortgage insurance service
- If you want to have fun, ask your lender if your insurance rates drop, while you pay down the principle on your loan? My guess the answer to this is No, so you are actually paying the same amount for an insurance policy with dropping value.
If you really want to be keen, after the first 5 year term of your insurance that you got from another source, see if it would be cheaper to let the policy lapse and get another 5 year term life insurance package for the remaining amount on your Mortgage, if it is, think about doing this (but remember if you let the policy lapse you will have to go through all proof of insurability tests, like a medical again).
So remember, mitigating the risk of a large debt by having a life insurance policy in place is a good thing (in my opinion), however, Mortgage Insurance typically offered by lenders is usually too expensive.