Life insurance sold by mortgage providers
[social_share]Life insurance is often sold by mortgage providers, although it can be necessary, standalone life insurance is almost always a better financial option.
Mortgage based life insurance is designed to protect the lender. If the person dies then the life insurance will pay out to the mortgage provider. This is a reasonable precaution for the mortgage lender to take, as a person who takes out a mortgage is always a risk and this is the way to minimise the risk.
Many mortgage providers will insist on life insurance being taken out when there is a small deposit, usually when the deposit is 20% or less than the price paid for the house. These insurance policies pay off the loan and nothing else, so while at the beginning of the loan the insurance policy may actually be for a large amount, this amount dwindles.
In many of these cases the mortgage provider will sell the insurance. However in most cases it is possible to ask for another life insurance provider. Although not all life insurance providers will provide this policy, some do and shopping around can save thousands of dollars over the term of the loan.
Below an 80% loan to value ration there start to become mortgage deals that do not need the mortgage insurance. If it is possible to get two home loans and one needs the insurance and one does not then it is a good idea to include the insurance premiums that are required before comparing the costs of the home loans. It may very well be the case that the home loan that looks the cheapest is actually the most expensive.
If there is no need to take out home loan life insurance as part of the terms of the loan, is life insurance a good idea for home owners? There are certainly good reasons for taking out life insurance for a home owner in order to pay off their mortgage, but a simpler term life insurance policy may be more suited for a number of reasons.
Firstly it is a general rule that a competitive market tends to be better value than a non-competitive market. And the term life insurance market is a very competitive market.
There is also the question of using the surplus. On a home loan tied policy then any surplus will go to the insurance company or the lender. However with a term life insurance policy the surplus goes to the survivors.
