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Do You Need Mortgage Insurance?

When it rains, it pours, or so the old saying goes. It seems like when something goes wrong with your life, a whole bunch of other things go wrong at the same time, doesn’t it? When you’ve found yourself out of a job for whatever reason, and also trying to deal with a mortgage payment at the same time, it can feel more like a deluge of rain than a light sprinkle.

Is there anyway to prepare ourselves against the rain, besides buying a great umbrella? While you can certainly have a rainy day savings account set up, not all of us are lucky enough to have enough income simply to fund a savings account for just in case. Thankfully, there are other options out there to provide you with a safety net. One of those options is called mortgage insurance. To find out if mortgage insurance is right for you, we’ll break down what the insurance actually is, what types are available, and if you should consider it or not.

What is mortgage insurance?

Mortgage insurance insures your mortgage, simple as that! It essentially covers you in the event that you aren’t able to pay your mortgage for the month, or many months. Now, this of course doesn’t mean that you can just decide to not pay your mortgage because you want to take that expensive trip instead, rather, there needs to be a valid and provable reason. Some of the main reasons you’d be eligible to be covered is if you lose your job, if you become seriously unwell and not able to work, or had an accident and also unable to work.

What are the types of mortgage insurance?

The types of mortgage insurance will depend on what you want covered. While you can certainly find policies that will cover the big three, most policies will be a one off covering either unemployment, sickness or an accident. Obviously the more you have covered, the more expensive it is.

The price of this insurance is going to vary based on more than just the type, however. You’ll also need to look into the three main factors of which insurance companies base their quote off of, listed below:

  • Pre-existing conditions: Just like health insurance or life insurance, mortgage insurance may base their quote off of your pre-existing conditions. This could include the insurance company reviewing your medical history to look for any red flags that would signal health problems in the future.
  • Risk of your job: Most insurance companies will want to know what kind of work you do to determine the cost. This is because some work is inherently more dangerous than say, an office job. If you’re working one of these dangerous jobs, you can expect your premium to be higher than an office job.
  • Age: This one is a pretty common factor with all insurance as well. The older you wait to get this insurance, the more risk the insurer is taking on, so they will charge you more.

When you do need it?

The best way to determine if you need mortgage insurance is to do some calculations. Simply determine how much the policy will cost by obtaining quotes, and then have a think about how much money you’d need if you were to be out of work for a month to one year. There isn’t a straightforward answer here, as we’re dealing with the risk of something happening rather than a sure thing, but it’s important to start thinking about it this way. Once you’ve costed out the price of the insurance and how much money you’d need each month to get by, there’s a few more things to think about.

  • No savings: Lack of savings is a really important reason why you might need mortgage insurance. If you don’t have any kind of safety net for an emergency, you should think about protecting yourself with insurance. It’s recommended to have three to six months of an emergency fund that could pay your bills and other regular spending.
  • Debt: Further on this spectrum, if you don’t have an emergency savings and you’re also experiencing debt of any kind, it’s even more important that you have a backup plan like this insurance. It might seem slightly counterintuitive to spend money on insurance when you’re in debt, but the cost of the insurance will likely be worth it versus the risk of you being unemployed while in debt.
  • No backup income: If you’re on your own without potential help from a spouse or significant other’s income, or family who is willing to pitch in during a hard time, you’ll again want to think about a backup plan.

When can you live without it?

  • Plenty of savings: As discussed above, if you’ve got a great safety net of savings and/or a secondary income that you could get by on for a few months, you’re likely in a good place in case of emergency.
  • Exclusion periods: If you know that you’ll be losing your job, like in the case of an impending redundancy, you should not consider mortgage insurance. It’s likely that the insurance company will have an exclusion period, which means that it won’t cover any claims in the beginning of the policy for a period of time (often several months). Anything that happens during that time will not be covered. Also, insurance companies may invalidate a claim if they uncover that you knew about your redundancy prior to purchasing the insurance.  

Once you’ve made your decision on mortgage insurance, remember that it’s important that you work with a qualified insurance broker to start up your policy. Do your research thoroughly and always read through the policy fine print several times so that you understand it, and so that you’re comfortable moving forward. Whatever your choice is, having a safety net of any kind will not only help you, but put your mind at ease for the future.

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