Mortgage Life Insurance – Why it shouldn’t be a rushed decision
By Danny Newman, Branch Manager – Beit Shemesh, Goldfus Insurance
What is mortgage life insurance?
Mortgage life insurance covers an individual for the sum of the loan in the event of death, with the main and legal beneficiary being the mortgage bank that the money was borrowed from. Mortgage life insurance policies have a very specific purpose; they pay the loan back to the bank in the event of the death of the policy holder, thereby alleviating the pressure of the mortgage repayments from the remaining family. They do not provide extra financial cover or support for the family, as per regular life insurance products.
There are different types of mortgages, which impact on the type of mortgage life insurances to be considered. The most common type of mortgages are monthly repayment mortgages whereby over the term of the mortgage, both the interest and the principle are paid back. In this case, the most appropriate type of mortgage life insurance would be based on a “reducing-sum insured” policy over the term of the mortgage where the sums insured reduce in line with the mortgage repayments.
In the cases where one takes out an interest only or “balloon” mortgage, the most appropriate mortgage life insurance would be a “fixed-sum insured” policy which is not too dissimilar to standard life insurance policies.
Important factors to consider when comparing quotes
- Interest rates
Interest rates across the globe fluctuate from year to year. As such, when taking a mortgage, it is important to consider these possible fluctuations (unless it is a fixed rate mortgage- which would not be linked to any index). A number of providers link the policy to the initial interest rate at the time the loan was taken, without taking into consideration the effect of increased interest rates in the future. Not only will this give the false impression that premiums stay lower throughout the lifespan of the policy, but any such increase can also lead to a situation of underinsurance, resulting in the family owing money to the bank even after the policy has paid out.
By way of example, consider a NIS 1 Million mortgage loan for 30 years at an initial interest rate of 3.5%. If the policy holder were to die halfway through the mortgage term and the interest rate had subsequently risen to 6.5%, the increase could result in a deficit of approximately NIS 100,000 between what the policy has paid out and the amount still owed to the bank.
- Discounts offered
Different companies, banks and insurance agents, frequently provide special offers and discounts. Many tend to offer larger discounts for the first few years with a significant increase in premium once the discount ends. It is important to consider not only the initial monthly premiums but also future payments throughout the lifespan of your specific mortgage. In many cases, it is cheaper taking a lower discount for the lifespan of the policy rather than a larger short term discount.
Obviously if the mortgage is taken for a short period of time, such as a bridge loan, then policies with larger initial discounts are preferable.
Other useful things to consider
- Length of term of the mortgage
The primary consideration when taking out a mortgage is how affordable the monthly repayments are. What many people fail to consider is the effect that a longer mortgage has on the monthly premiums for the mortgage life insurance. Whilst the monthly mortgage payments may be more affordable the longer the term, the life insurance premiums will do the opposite and become more expensive the longer the term and the older you become.
It is recommended to weigh up the overall monthly cost of both the mortgage repayment and the mortgage life insurance premiums to arrive at the optimum term for one’s mortgage.
- Large mortgages
Above certain sums insured, insurance companies may require further medical tests and in certain cases a financial questionnaire to be completed before the issuing of the policy. Insurance companies will also take into consideration the sums you have insured on other life insurance policies through them when deciding on whether or not any additional testing or forms are required.
As timing is often of the essence when taking out a mortgage and organizing the relevant insurance policy, it may be prudent to consider alternative insurance companies to where you are currently insured, or splitting the policies between a number of different companies to keep the sums insured lower, and thereby avoiding the extra, time consuming underwriting and forms.
Whilst appearing to be a rather complex topic, a reputable insurance professional who specialises in mortgage insurances with all the major companies will be able to assist you on deciding which plan suits your needs and fits the type of mortgage you are embarking upon.
The mortgage process is often a stressful and time pressured period. In order to obtain the best and cheapest mortgage life insurance policy, it is advisable to explore options from the outset and not leave it to the last few highly pressurised days.
The underwriting process for some companies can take a few days depending on the policy holder’s health condition, so the appropriate planning will make this part of your mortgage experience as smooth as possible.
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