Exploring the Variety of Life Insurance Policies
In the realm of financial planning, risk life insurance plays a crucial role for those who have dependents that would be financially affected by their death. Here's a breakdown of the different types of risk life insurance and how they can help with mortgage protection.
Risk life insurance is a policy that pays out a sum agreed upon with the insurer to a specific person in the event of the policyholder's death. There are various types of risk life insurance, including Classic Risk Life Insurance, Combined Risk Life Insurance, Cross-Over Insurance, Constant Insurance Sum, and Decreasing Insurance Sum.
For mortgage protection, the most straightforward method is to match the insurance coverage to your remaining mortgage balance. This ensures that if you pass away, the death benefit can pay off the mortgage entirely. To achieve this, you can determine the current balance remaining on your mortgage loan, choose a policy term that covers the length remaining on your mortgage (e.g., 15 or 30 years), and opt for a decreasing term life insurance policy if you want the death benefit to decrease annually in line with your mortgage principal reduction, potentially lowering premiums. Alternatively, you can choose level term insurance if you prefer the death benefit and premiums to remain constant through the term, allowing more flexibility for other expenses.
A more comprehensive way to calculate your risk life insurance need for mortgage protection (and other financial obligations) employs the DIME method, which stands for Debt, Income, Mortgage, and Education. This method provides a broader financial protection calculation by adding your debts, income replacement, mortgage balance, and education costs for children or other dependents. The sum of these figures yields a recommended total life insurance coverage. If you intend the coverage specifically for the mortgage, focus on the mortgage portion of this calculation.
It's essential to note that the cost of risk life insurance depends on the insurance term, the insurance sum, and factors such as age, health status, profession, hobbies, and smoking status. Additionally, the insurer will not pay out in case of death if the policyholder made false statements during the health check.
Insurers have different views on which pre-existing conditions or injuries require risk surcharges. If you have a serious health condition like cancer, some insurers may be much cheaper for you than others. Some policies allow extending the term of the risk life insurance later, but there's a maximum age limit set by the insurer.
In the unfortunate event of the policyholder's death, you must send the insurance policy and death certificate to the insurance company. The insurer may request a medical certificate stating the cause of death. The cause of death is largely irrelevant for the insurer, except for the two exceptions when the policy does not pay out: suicide within the first year of the policy or participating in dangerous activities that violate the policy terms.
Some policies allow excluding certain causes of death from the payout, in exchange for avoiding risk surcharges. The duration of the risk life insurance policy should be considered based on how long dependents will rely on the policyholder's income, such as until children reach the age of majority or until a mortgage is paid off.
In summary, for pure mortgage protection, you typically need life insurance that covers your current mortgage balance, ideally with a term matching your mortgage duration, often using decreasing term insurance to reflect declining debt. For broader financial security, you might consider adding income replacement, debts, and education expenses to this base amount.
Key points:
| Method | What It Covers | Notes | |------------------------------|--------------------------------------|--------------------------------------------| | Mortgage balance only | Remaining principal of your mortgage | Simple and direct for mortgage protection | | Decreasing term insurance | Death benefit decreases with the mortgage balance | Usually lower premiums | | Level term insurance | Fixed death benefit throughout term | More expensive but stable coverage | | DIME method | Debt + Income replacement + Mortgage + Education | Broader financial protection calculation |
Other financial obligations, such as debts, income replacement, and education costs for dependents, can be covered using the DIME method for a more comprehensive risk life insurance planning. Personal-finance considerations like the insurance term, sum, and factors like age, health status, and smoking status impact the cost of risk life insurance.
