Life Insurance Advice What is Term Life Insurance and how it compares to mortgage insurance?
While term life insurance has been around for a long time, many people have lots of questions about it. What does “term” mean? What is a renewable and convertible policy? How does this term life insurance compare to bank mortgage insurance? In this blog, we asked our Managing Advisor – Life Insurance Division, Christina Wyatt, to sheds some light on these frequently asked life insurance questions.
What is Term Life Insurance?
People use term life insurance to cover financial obligations that are not permanent. For example, your mortgage is a financial obligation with a set end date. Other debts often fall into the term category as does insurance intended to replace your income, which typically ends after you retire.
Term life insurance often comes in 10-year and 20-year terms, but you can also pick other terms depending on how long the insurance is needed. Your insurance premiums and coverage benefits will remain the same for the entire term.
Your partner, spouse, or family likely depend on you to pay a portion or all of your household expenses. Sadly, if you were gone, they would need this income replaced. In 10 years and 20 years out, this amount is going to change – usually, less will be needed. This is the main reason for term life insurance.
What is a “renewable” and “convertible” policy?
When you hear the word “renewable” on a term life insurance policy, it means that after the initial term is over the insurance premium will renew at a high premium rate. In most cases, it is less expensive to buy a new term insurance policy than to let it renew. You may choose to let it renew in cases where your health has substantially changed (for the worse), therefore getting a new policy may be more difficult.
A convertible policy can be switched to a permanent policy without any medical requirements or underwriting. When you apply for life insurance you must answer a series of medical questions and sometimes meet with a nurse to ensure you are healthy. When you use your conversion privilege you do not need to provide any additional medical information. Even if you are not healthy, the insurance provider must give you the coverage.
Term life insurance vs. bank mortgage insurance.
When you get a mortgage, the bank (or another lender) will offer you insurance that will pay out the balance of your mortgage on your death or death of your spouse. The monthly premium on this “mortgage protection insurance” is set to remain the same for the entire term of the mortgage. The payout from this type of insurance shrinks with your mortgage’s declining principal balance.
If something bad happens and you need to claim your mortgage protection insurance, unfortunately, only the balance of your mortgage (which could be a lot less) will be paid and your family does not receive any additional funds. This alone makes mortgage protection insurance a bad deal compared to term life insurance that does NOT shrink over the term of the policy. And your claim is paid to your beneficiary not the bank.
It is in the best interests of the bank when they sell you mortgage protection insurance. You and your family are more important. Simply put, mortgage protection insurance is not a good deal which is why financial advisors everywhere recommend getting term life insurance instead.
For more information about Term Life Insurance or to contact Christina Wyatt for a personal life insurance advice session, visit our Life Insurance webpage.