Anecdotes and Advice from a First Time Home Buyer Part 10 – Insurance

by Mike Holman

 

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 9 – Closing costs.

 

Insurance of various kinds

In arranging insurance for our house, my husband and I were presented with other forms of insurance for consideration. Insurance is akin to gambling with your future; it is something for which one pays, but hopes never to require. The insurance companies take a similar approach in evaluating your circumstances, as they lose profit when they have to pay out money. Deciding what was appropriate for our circumstances was really a calculated guess based on what we thought the future could bring against how much money we were willing to put towards potentially (and hopefully) unnecessary expenses.

Home Insurance

Mortgage lenders require that fire and liability insurance in the form of home insurance be in place before closing. The insurance company places a replacement value on the house and property, and is another form of guarantee for the bank or trust company that its investment in your home is protected.

When shopping around for home insurance, I found it odd that it is an industry that is not transparent about its products. The insurance companies that I contacted, all recognized names, provided quotes based on the parameters that were discussed, but the specifics of the policy and its exclusions (i.e. the fine print) were not available until a policy had been accepted. Costs seemed to vary greatly between companies, and it was tricky deciding which policy was superior based on incomplete information. Nonetheless, home insurance is not something that one can choose to go without and I accepted a reasonably priced policy from a reputable company.

There are many elements that are factored into the cost of home insurance. If you own a car, it is best to start with the company that holds your car insurance as there are incentive discounts for purchasing additional products with the same company. Also check if your employer or professional membership association has negotiated any group discounts.

When calculating your policy cost, an insurance company creates a risk profile of your home and property. Factors such as the age of the house, type of exterior (brick, siding, etc.), style of the roof and percentage of older knob and tube wiring are examined.

Based on the insurance company’s criteria, a replacement value of the house and property is calculated. The replacement value is the cost to the insurance company to rebuild your home if anything should happen to it. I was dismayed to learn that the replacement value of the house was considerably less than what was paid for it, but learned that the land has a significant separate value.

Other factors which determine the cost of property insurance include the size of the deductible selected and the comprehensiveness of the coverage. Choosing a higher deductible, or a higher amount that one is prepared to pay before filing a claim, lowers the cost of the insurance. In addition, having a monitored security system in place will also decrease the annual insurance cost by anywhere from 5 to 20 per cent depending on the type of system installed and the insurance company’s criteria.

A comprehensive policy is the most inclusive home insurance policy and covers both the building and its contents for all risks, except for those specifically excluded. There are other policies that insure against specified perils, but I did not look into them. Like everything else, insurance products vary and merit some homework.

Term Life Insurance versus Mortgage Insurance

It is optional whether you choose to take out insurance to cover the mortgage. Mortgage Insurance is paid directly to the bank for the mortgage, and as I understood it, does not necessarily cover any administrative fees that may crop up. Term Life Insurance was recommended to us as an alternative to Mortgage Insurance as it cheaper and paid directly to the beneficiary upon the death of the policy holder. Another benefit to term life insurance is that the screening takes place before the insurance is approved so there is very little chance that the insurance won’t be paid out because of pre-existing conditions which is the case for mortgage insurance. Here are some ideas on how to calculate the amount of life insurance you might need.

Term Life is taken out for a specific time period, and can be cancelled at any time. Unlike Whole/Universal Life Insurance, which is a permanent life insurance vehicle, there are no penalties to cancel a policy. Term Life Insurance is a temporary type of product. Policies are usually for 10 or 20 year periods. A Term 10 policy has cheaper annual premiums, but the premiums fees can increase substantially after 10 years quite simply because one is older and may have had health changes. Term 20 premiums are slightly more expensive than the Term 10, but the fees remain the same for a 20-year period. The choice with these products is entirely dependent on individual circumstances and financial means. Some of the Permanent Life policies are advantageous in financial planning, but exactly how that works is a bit of a muddle to me.

When you have dependents, life insurance makes a lot of sense in that you want to ensure some money for your family’s future. The question is whether two healthy individuals require life or any other additional insurance when there are no dependents. After all, that extra $20, $50 or $100 a month could be directed to an RRSP or other money-earning vehicle.

Disability and Critical Illness Insurance

Aside from life insurance, my husband and I were asked to consider insurance in case something happened which threatened our livelihoods. These are very personal decisions and definitely expensive considerations. The group health plans with many companies often include life and disability benefits. You may want to confirm with your Human Resources Department about the particulars of your company policy and decide if they are sufficient for your circumstances.

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{ 2 comments… read them below or add one }

1 Paolo

Whole Life and UL policies do not have cancelation fees. These policies have account values which you can cash in, the “cash surrender value”. However, if you cash it in too early, the CSV will be less than the AV. (This is done to allow the insurance company to recover its issue costs in case the policy lapses early.) Generally, there is not much account value in the early years. If you cancel your policy, which you can do by just not paying your premium, the insurance company will not send you a bill for canceling.

The CSV is known as a “non-forfeiture benefit”. You can also take the CSV and buy a reduced paid up policy. In this case, your death benefit (face amount) is reduced, but you no longer are required to pay premiums (ie, it’s paid in full). Another benefit is to take an extended term policy. Again, your CSV is used to pay for term insurance over a fixed number of years (determined by the amount of CSV) with the same death benefit.

One thing about UL is that you don’t even have to pay a premium if you don’t want to. As long as your AV has money in it to cover the charges, it will stay in force. (But you will have to dump in more money later on to keep alive.)

You can also buy a term to 100 policy. This is essentially a cheap permanent insurance policy without any of the benefit features described above. If you lapse this policy, you get nothing. This is pure insurance. (And I believe if you live to 100, they will just pay out the benefit.)

Some useful information on life insurance:
http://www.clhia.ca/download/Life_Brochure_EN.pdf

2 Byron Udell

Term life insurance is by far a better product to buy than mortgage life insurance. Why? Because if you died, your family will need more than just the mortgage paid. In addition, the death benefit remains the same for term life insurance. If you take out a $500,000 policy, your family will get $500,000 if you died. With mortgage life insurance, your family will only get what is currently owed on the mortgage, but you will continue to pay the same price. Mortgage life insurance actually gets more expensive throughout the years because the benefit you would get reduces as what you owe on your mortgage reduces.

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