One aspect of personal finance that is often overlooked is insurance. It’s often viewed as a product that is not needed, confusing, and/or simply expensive. My view is that there are some insurances that are essential to have, and perhaps even a foundation of personal fiscal health. This post originated from an email received by a reader who is confused about all the insurances offered and wanted a brief summary on the offering and the essentials.
CMHC Mortgage Insurance
For home owners out there, it is more than likely that you were required to pay the CMHC fee with your first mortgage. The term “insurance” in this case can be deceiving as it does nothing to insure the home buyer. This fee, infact, insures the bank against default on payments, except that the home buyer pays the fee. Pretty good deal for the bank hey? As I’m not a fan of fees, I typically try to put down at least 20% when purchasing real estate to avoid CMHC altogether.
Mortgage Life Insurance
This is an insurance that your mortgage agent may offer that will cover your mortgage balance in the case of death. The premiums are normally fairly reasonable for this insurance, but often very close in cost to term life insurance.
I avoid this insurance for many reasons, one of them being is that it’s a declining balance insurance. That is, as you pay down your mortgage, the coverage decreases, but the payments remain the same. As well, it’s the lender who is really the beneficiary, whereas with term life, the payout goes out to the named beneficiary. Finally, and perhaps most importantly, mortgage life insurance is typically a “post-claim” insurance which means that it’s not underwritten until a claim is made. In other words, the insurance company can deny the claim if they determine during their investigation that a health issue was not declared when the mortgage initiated. In my opinion, you’re better off going with a term life policy to cover the mortgage amount.
Term Life Insurance
You know how the saying goes, “buy term and invest the rest”. Term life insurance is a lower cost life insurance option that covers the policy holder for a pre determined amount for various lengths of time in the case of death. It’s basically the no-frills of insurance options, and the one I personally use. The premiums (cost) of the insurance depends on your age, health, coverage and the term. I’m a believer of working towards becoming self insured which is when your income producing assets are enough to cover expenses and/or debt, which is why I buy term and invest the rest. Term life is one of those “must have” insurances IF you have dependents. How much do you need? This is how I calculated my term life requirements.
One more tip, when you do get term life, make sure that it’s renewable and convertible. That way, if the term is up, and you still want coverage, you can renew with less hassle. Here is a FREE e-book that I found that explains the basics of life and living benefits insurance. It’s written by an insurance firm, so the content is a bit sales like, but there is some good stuff in there (like the section on how insurance agents are compensated).
I’ll continue this article in Part 2 tomorrow!