What Home Owners Need to Know About Life Insurance

Posted on October 13, 2016 and updated October 13, 2016 in Life Insurance Canada News 6 min read
life insurance for home owners

Once your mortgage application is approved, your lender will tell you that you should have mortgage insurance in the event of disability, illness or death. You don’t want to leave your spouse with a large mortgage in case tragedy strikes, so you instinctively sign on the dotted line. But is this really a good idea?

With the high cost of houses these days, budgets are tight. A more affordable option is a 20-year term life policy for both you and your spouse. If either of you die, the other receives a lump sum. The question is, how much coverage do you need?

Lorne Marr, founder of LSM Insurance, suggests using your mortgage balance as a base amount. As quoted by Rob Carrick of the Globe and Mail, Mr. Marr states that if a couple largely relies on the income of one spouse, the higher-income spouse should have a larger policy than the basic mortgage amount. This would provide the surviving spouse with a little nest egg after the mortgage is paid.

After you start a family, your insurance needs change. This can be easily handled by increasing your coverage. “A quick rule of thumb for people with kids under 10 years old is 10 times your annual income,” Mr. Marr said. “If you have kids over 10, it’s five times your annual income.” If this amount is out of reach, keep in mind that less coverage is better than no coverage at all.

What type of insurance should you get – term, permanent or universal?

Term life means you pay a level premium for the term of your policy and in the event of your death, your beneficiary receives a lump-sum, tax-free payment. This type of insurance is very affordable and can be a good choice for younger people and families. A term policy has no cash value.

Permanent insurance is very complex that typically provides a death benefit as well as a cash value. There are several types of permanent insurance such as whole, universal, variable, index-universal and variable-universal. Premiums are higher than those for a term policy, however your premiums build up a cash value over time.

Get a policy large enough to cover your current mortgage.

Your mortgage is probably your largest debt. The last thing you want to do is leave your spouse with such a huge debt to pay off all alone, especially if you are the primary earner. This could prove financially devastating to your family. Getting a policy a bit larger than your mortgage is even better because it will provide your spouse with a little extra money to help make the adjustment to life without your income.

Understand other home-related expenses.

As a homeowner, you know there are all types of other costs in addition to your mortgage payments. You have your upfront costs, ongoing costs and occasionally you are hit with some unexpected costs. The upfront costs are paid when you buy the house. Ongoing costs, such as utilities and routine maintenance, are never paid up. They keep coming, month after month, year after year. Unexpected costs can occur after a severe storm or an accident such as a fire.

To help retain or increase the value of your home, it must be properly maintained. Your life insurance policy can help protect your investment by providing your beneficiaries with the money they need to pay for upkeep. Adequate insurance can also help your family keep the house instead of selling it because they can’t afford the upkeep.

Calculate how much you typically spend on your home each year then purchase a policy that will cover your mortgage and plus other home-related expenses your family may incur in the years to come.

Life insurance vs mortgage insurance.

Lenders want to make sure you will pay off your mortgage, that is why they try to talk you into buying mortgage insurance from them. Mortgage life insurance will pay off the amount still owing on your mortgage, but nothing more. A life insurance policy can pay off your mortgage, plus leave a little extra.

Another problem with mortgage life insurance is that you lose it if you sell your house. You can’t transfer your policy to your new home.

The limit for mortgage insurance is typically $500,000, which may not be enough. The premiums stay the same for the life of the policy, however the payout amount declines with every mortgage payment you make.

Insurance needs change over time.

You should re-evaluate your policy periodically. Your circumstances can dramatically change over time, so each time something in your life changes, review your insurance needs.

Re-examine your policy when buying a new or bigger home.

When you buy a new or bigger home, your mortgage and maintenance needs change. Remember to upgrade your insurance policy to cover these changes.

Employer offered life insurance may leave you with no coverage.

Group insurance provided by your employer may be adequate, but this coverage only lasts as long as you stay with the company. If you change jobs or become self-employed, your coverage is cancelled. It is always better to have your own insurance coverage. This always you to choose your provider and the level of coverage you need.

Difference between homeowner’s insurance and life insurance.

When people buy homeowner’s insurance, they often assume they don’t need life insurance. One has nothing to do with the other. The two address completely different needs.

Homeowner’s insurance covers the cost to repair or replace your home in case of damage caused by fire or some other accident. It may also cover the replacement costs of anything lost or stolen from inside the house and damage to out buildings.

A life insurance policy pays a tax-free lump sum to your beneficiary in the event of your death. This money can be used to pay off your mortgage, make home repairs and help your family meet their financial obligations.

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