I thought I'd take the time to respond to a comment from mikem. Life insurance is something that you don't really think about until you have kids. The advice I follow with life insurance is from The Wealthy Barber. David Chilton recommends to purchase term life insurance and advises to look ahead when picking the size of the benefit. Avoid insurance with a savings or investment component - term life will give the most bang-for-the-buck. I too purchased life insurance just before my first son was born, right from a bank. When my second son was on his way, I talked to an insurance broker to explore some options and boy was I happy I did that! I got a 10-year term-life policy with a higher benefit than before and for less money each year. That was my first encounter with bank furnished insurance and the more I learned the more I disliked it.
The term life policy from the bank was done online and completed instantly. My current policy required a visit from a registered nurse, but it was well worth the cost decrease. This difference was something that struck me as odd - I thought that any institution that provides insurance would have to follow similar procedures and this was validated by news articles a few years back - 2005 or 2006 I believe. At that time, several Canadian news organizations published articles about the insurance provided by banks on mortgages and lines of credit. Let's use a line of credit as an example - for x cents per hundred dollars every month, the bank will insure that you never miss a payment. Sounds like a safe thing to do. The aforementioned articles told the story of some mortgage holders that got sick and were not able to make payments, but weren't worried because they had the insurance from the bank for this situation. You know where I'm going - the bank wouldn't cover the payments and they lost their house. Turns out that banks have different rules governing them, so they don't have check if purchaser of the insurance qualifies until they make a claim against the insurance. The money payed out every month for the insurance was not refunded. Insurance companies have to check if you are qualified before they give you the policy, so a standard insurance company wouldn't have this problem. The one that bugs me is the line of credit insurance - the more money you have borrowed, the more you pay in "insurance". Some versions cover loss-of-job problems, but I think it is most typically there in the event the holder dies. This is where a good term-life insurance comes in - it can cover all your debt costs in the event you pass away. Once you hold the policy, you are covered and you can drop all those little insurance "options" offered by banks.
2 comments:
Not to mention that Mortgage-Insurance:
a) Costs more then term life insurance
b) Protects the bank not you
c) Has a declining return. If you've paid off half the principal, it only covers the balance remaining, so the benefit decreases with every mortgage payment you make.
Excellent points! It always makes me feel better when someone provides more evidence to support my position. I think most of those insurance-like products from the bank must be more for the bank's benefit. Almost like the extended warranty at electronics stores - it's pure profit for the store, and commission (where applicable).
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