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Car insurance - got it. Health insurance – yep, have that, too. Home owners – of course. Life insurance – I think so. Disability insurance – Maybe not. Mortgage protection life insurance– now it’s getting confusing?
Before I go too far, let’s take just a moment to review what insurance is. My favorite definition of insurance is: The substitution of a small known cost for a large uncertain cost
The small know cost is, of course, your insurance premium. A large uncertain cost is usually the result of some unexpected, unfortunate event such as a health issue, a car crash, a house fire, death or disability. To mitigate the financial impact of these events, we buy insurance.
For most people, buying a home is the biggest transaction and financial commitment they will ever make. Meeting that commitment is usually possible on a long-term basis because of our income producing abilities. However, should the wage-earner no longer be able to work because of illness, injury or death, the family could lose their home. This is an unacceptable consequence that, in most cases must be covered with insurance.
Let’s look at the kinds of insurance you may want to consider.
Mortgage Protection Life Insurance
If you have recently bought a new home or refinanced, chances are your mailbox has been flooded with offers to insure your home. Before you decide to buy it or not, let’s find out what it exactly is. Mortgage life insurance is insurance that is typically bought through the financial institution that has your mortgage (like your bank). The amount of coverage that is purchased is the amount of your loan where if something happened to you the bank would be the beneficiary and pay off the loan. In most cases, the policy benefit decreases as the outstanding loan amount although the premium you pay stays the same.
In most cases, Mortgage Protection Life Insurance is easier to get than traditional life insurance. However, because of the convenience and relaxed underwriting practices, it tends to be more expensive. If convenience and speed are your top priorities, consider mortgage life insurance policies along with other simplified issue policies. If other things like price, company quality, and so on are more important to you, another life insurance option might work better. We’re all different – there’s no one right answer for everyone.
Individually Owned Life Insurance
There are many different types of life insurance available to individuals. They differ from Mortgage Protection Life Insurance in a number of important ways.
1. The beneficiary can be your spouse, your kids or other heirs rather than the bank.
2. The amount can exceed the amount owed on the house. This extra money can provide for other needs such as living expenses, college tuition for the children and savings for retirement.
3. In some cases, it can be structured so that it never expires or that you get your premiums back in the event that you do not die during the term.
4. Flexibility – as the owner of a life policy, you can change beneficiaries (often necessary after a divorce, for example), you can direct the funds to a trust for minor children, you can reduce the face amount and corresponding premiums and you can eliminate riders that are no longer needed.
A good agent should be able to help you think through the options.
Disability Income Insurance
Disability Income Insurance (DI) is designed to give you cash to replace part of your income in the event you become unable to work because of sickness or injury. These policies typically have many “moving parts” and are not often well understood. The amount of coverage one can get is limited by, among other thing, their current income. When buying a DI policy, you must make a number of important decisions. A good understanding of the contracts and how they work is extremely important. Different companies define “disabled” differently. This is important because you must meet their definition before they will pay a benefit. Some companies use a definition something like “because of illness or injury, unable to perform the substantial duties of your job”. Others may use “completely incapacitated”. To my mind, the latter is virtually useless. A good broker will:
• Understand the various contracts
• Know which companies offer products that work well with your profession
• Know how mental & nervous disorders are covered
• Understand how the various companies will (or will not) penalize you for any given health condition.
• Help you understand how much coverage you need for your situation
These are complex policies and should be bought only with professional guidance.
To learn more about disability insurance go to http://www.halfapaycheck.com/an824na/Default.aspx.
Written by:
Andrew Nance
Great Falls Financial, LLC
andrew@greatfallsfinancial.com
703.463.0983
