Q: Your most recent article, on mortgage insurance, was fine with me, and I wonder if you would recommend the same strategy for my situation. I am a 45 year old man, divorced and my only beneficiary is my son. Fortunately, he is well launched in his career and no longer depends on me or my ex-wife. I am refinancing my Dundas bungalow mortgage and the current balance is $232,000. The amortization is now 20 years, so I plan to retire at age 65 and at the same time be mortgage free. The loan company offered me mortgage insurance, but since I have no dependents, I assume you will suggest that I decline mortgage insurance. Do I need this coverage or would the money be better spent on my retirement savings?
A: In my last money for life column (thespec.com, May 26), I discussed the pros and cons of mortgage insurance versus personal life insurance, both of which pay on the death of the insured.
You might remember the key question in deciding whether you need one or the other type of life insurance: “If you died, would anyone be in financial difficulty?” »
For your situation, I suspect the answer would be “no” because your son is no longer dependent. If you were to die without mortgage insurance or personal life insurance while you still had the mortgage, it is likely that your home would be sold, a portion of the proceeds would be used to clear the remaining mortgage, and the net amount would be part of your estate.
In all of these scenarios, your son would benefit – not you – because he is the sole beneficiary of your estate and would likely be the beneficiary of any life insurance policy.
However, there is a type of insurance that you should consider – of which you would be the beneficiary – if something serious should happen, as you plan for your retirement and the elimination of your mortgage over the next 20 years.
With Critical Illness Insurance (CIW), you receive a tax-free lump sum if you are diagnosed with a listed critical illness, such as a heart attack, cancer, stroke, brain injury or tumor to the brain, going blind or deaf, coma, heart valve bypass or replacement, dementia or Alzheimer’s disease, kidney failure, major organ transplant or being put on a waiting list, multiple sclerosis and Parkinson’s disease . The policy does not pay if you twist your ankle or break your leg; it is intended to cover you for any illness that could really upset your financial situation and your retirement plan.
You do not have to prove that you cannot work or that you are disabled; the policy pays at the time of diagnosis and you can use the funds for whatever you want. Perhaps you would choose to reduce your debts (including your mortgage), create an income stream, take time off work, invest the funds for your future, seek medical treatment abroad, or fund private home care, or the proceeds could be invested to generate income that could pay the current monthly mortgage payment. The ICN product can effectively save you time to get healthy without any financial strain. A qualified insurance professional can help you decide if this particular type of insurance is right for your particular financial situation.
You even have the option of having all CII policy premiums returned to you at a later date, called refund of premium (ROP). You could choose to have this happen at age 65, when you plan to retire and eliminate your mortgage. This way you have a financial contingency in the event of a critical illness, with insurance payments being returned to you if you remain healthy. With this strategy, you are covered and can use the tax-free ROP to help fund your retirement.
That’s what I call a real financial win-win.