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Life insurance tied to a mortgage

No matter how you choose to measure these things, buying a home is always always the largest single purchase people make. Worse, because most people do not have the tens of thousands lying around to pay cash, this means the largest single debt the family has hanging over them. It is therefore wise for the family to include the amount of the debt in any decisions about insurance. The good news for life cover is that this debt is a reducing balance. What would take up a significant percentage of the sum insured if one borrower was to die within the first ten years gradually reduces so that, if you stay put, twenty-five years sees the debt paid off and the sum insured available for a range of other purposes. Given the current state of the housing market, more people are unable to sell and therefore paying down their mortgage debts. This is a far more healthy state of affairs than during the credit boom when money was freely available and people were steadily trading up the housing market. Should we return to the bad all days of rising resale values and easy credit terms, it becomes increasingly important to keep the amount of the life cover under review. What might have been adequate when you bought your first home, may slowly become increasingly inadequate as the amount of the borrowing increases.

The alternate strategy is credit insurance. This is limited to the initial amount borrowed and so is a lot cheaper than life cover. But there is a major problem. When you buy life cover, the insurer cannot simply cancel the policy if you are suddenly diagnosed with a fatal disease. When you buy credit insurance, there is significantly less protection and, in many cases, the insurer can cancel the policy should your health suddenly decline. In a recent case in Florida, a man diagnosed with a terminal disease was surprised to receive a letter from his insurer canceling the policy. All the insurer has to do is avoid discriminating against an individual. So long as everyone in a group has their policy canceled, the insurer is usually home free (pun intended). As a result of a significant political outcry, the insurer backtracked and reinstated the policy for all those in the group. But cases like this should serve as a warning to everyone who buys credit insurance. Although you may see a fixed termination date on the quote and the resulting policy, the insurer always has the right to cancel written into the policy.

So, when you are taking out a mortgage or any other large loan, think very carefully about how this amount will be repaid should you have the misfortune to pass on. The mortgagee or other lender will be pushing you to buy additional credit insurance. Most earn a commission on these sales and will usually be aggressive in pushing them. However, given the risk the insurer will terminate if it looks as though a claim will be made, it is always safer to buy cheap life insurance. Term insurance is the most cost effective. If there is enough in the existing life cover, you can refuse the lenders with confidence. If you are uncertain, get life insurance quotes on topping up the existing policy.

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