If you’ve ever gone to a lender to get a loan or a mortgage you were probably asked if you wanted Life insurance. If you said YES, I might be able to save you some money. I’ve spent a lot time comparing the cost and coverage differences between the debt protection (life insurance) that lenders sell versus the private life insurance you can purchase. The differences are staggering.
Let’s talk costs first. Whether you are single or a couple, the difference in rates and the cumulative cost over the life of your mortgage is significant.
Let’s look at Jennifer’s situation. She is 30 years old and buying her first house and is taking out a 25-year mortgage of $350,000. Her lender offered her life insurance protection on the mortgage for $0.15/$1000. The rate increases over time. 20 years into her mortgage, it will be $0.40/$1000. $0.40 doesn’t sound like a lot. It even seems pretty cheap. But consider this, over 20 years Jennifer will have spent close to $20,000 on the lender’s life insurance. Since the value of her mortgage has been paid down to about $100,000, the coverage she has in place has decreased. Remember the pay out at time of claim simply covers principal balance on your debt. It doesn’t get paid to a beneficiary. Hmmmm, does anything feel off to you? It does to me.
I took Jennifer’s situation and decided to see what it would cost her to get a 25-year Term Insurance policy for $350,000. Jennifer is a non-smoker, so at age 30 the rate was only slightly less per $1,000 of coverage than her lender’s rate and this rate stayed fairly consistent for the next 9-years and then things began to change. After 20 years she would have paid approximately $5,100 of premium for this private policy, compared to the lender’s $20,000. That’s close to $15,000 that Jennifer could have had as pocket money or that she could have put into her travel fund or even her TFSA. The other major difference was that, at the 20-year mark, she still had full insurance coverage of $350,000 payable to her beneficiaries versus the $100,000 the lender would have used to pay off her mortgage.
I don’t know about you, but I will be telling all of my friends and family!
I always tell my clients to review their expenses periodically. You’d do it with your cable provider, why not do it with your insurance. If you have any form of debt with insurance attached, let me run your numbers, maybe we can save you some money too.
Patrick Jamieson
P.S. I should mention that it is not 100% of the time where premiums are cheaper. Some health conditions result in additional ratings for private term insurance but having said that, these are also the risks that could restrict payout for a lender policy, leaving you uninsured.