How Much Life Insurance I Can Hold

How Much Life Insurance I Can Hold?

Very few people enjoy thinking about the inevitability of death. Fewer yet take pleasure in the possibility of an accidental death. If there are people who depend on you and your income, however, it is one of those unpleasant things that you have to consider. In this article, we'll approach the topic of life insurance in two ways: first, we will point out some of the misconceptions about life insurance and then we'll look at how to evaluate how much and what type of life insurance you need.

Does Everyone Need Life Insurance?

Buying life insurance doesn't make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer's fees, etc.), then insurance is an unnecessary cost for you. If you do have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), then you do not need life insurance.

However, if you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, then you likely will need insurance to ensure that your dependents are looked after if something happens to you.(To learn about insurance basics, see Understand Your Insurance Contract and Exploring Advanced Insurance Contract Fundamentals.)

Insurance and Age

One of the biggest myths that aggressive life insurance agents perpetuate is that, "insurance is harder to qualify for as you age, so you better get it while you are young." To put it bluntly, insurance companies make money by betting on how long you will live. When you are young, your premiums will be relatively cheap. If you die suddenly and the company has to pay out, you were a bad bet. Fortunately, many young people survive to old age, paying higher and higher premiums as they age (the increased risk of them dying makes the odds less attractive).

Insurance is cheaper when you are young, but it is no easier to qualify for. The simple fact is that insurance companies will want higher premiums to cover the odds on older people - it is a very rare that an insurance company will refuse coverage to someone who is willing to pay the premiums for their risk category. That said, get insurance if you need it and when you need it. Do not get insurance because you are scared of not qualifying later in life.

Is Life Insurance an Investment?

Many people see life insurance as an investment, but when compared to other investment vehicles, referring to insurance as an investment simply doesn't make sense. Certain types of life insurance are touted as vehicles for saving or investing money for retirement, commonly called cash-value policies. These are insurance policies in which you build up a pool of capital that gains interest. This interest accrues because the insurance company is investing that money for their benefit, much like banks, and are paying you a percentage for the use of your money.

However, if you were to take the money from the forced savings program and invest it in an index fund, you would likely see much better returns. For people who lack the discipline to invest regularly, a cash-value insurance policy may be beneficial. A disciplined investor, on the other hand, has no need for scraps from an insurance company's table.

Cash Value vs. Term

Insurance companies love cash-value policies and promote them heavily by giving commissions to agents who sell these policies. If you try to surrender the policy (demand your savings portion back and cancel the insurance), an insurance company will often suggest that you take a loan from your own savings to continue paying the premiums. Although this may seem like a simple solution, this loan will cost you, as you will have to pay interest to the insurance company for borrowing your own money.

Term insurance is insurance pure and simple. You buy a policy that pays out a set amount if you die during the period to which the policy applies. If you don't die, you get nothing (don't be disappointed, you are alive after all). The purpose of this insurance is to hold you over until you can become self-insured by your assets. Unfortunately, not all term insurance is equally desirable. Regardless of the specifics of a person's situation (lifestyle, income, debts), most people are best served by renewable and convertible term insurance policies. They offer just as much coverage and are cheaper than cash-value, and, with the advent of internet comparisons driving down premiums for comparable policies, you can purchase them at competitive rates.

The renewable clause in a term life insurance policy means that the insuring company will allow you to renew your policy at a set rate without undergoing a medical. This means that if an insured person is diagnosed with a fatal disease just as the term runs out, he or she will be able to renew the policy at a competitive rate despite the fact that the insurance company is certain to have to pay out.

The convertible insurance policy provides the option to change the face value of the policy into a cash-value policy offered by the insurer in case you reach 65 years of age and are not financially secure enough to go without insurance. Even though you will be planning in the hope of not having to use this option, it is better to be safe and the premium is usually quite inexpensive. (To learn more about life insurance types, see Buying Life Insurance: Term Versus Permanent, A Look At Single-Premium Life Insurance and What is the difference between term and universal life insurance?)

Evaluating Your Insurance Needs

A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:

How much debt you have: All of your debts must be paid off in full, including car loans, mortgages, credit cards, loans, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover you debts (and possibly a little more to take care of the interest as well).

Income Replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% (if you do not trust your dependents to invest, you can appoint trustees or chose a financial planner and calculate his or her cost as part of the payout). Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Remember, you have to add this $540,000 to whatever your total debts add up to.

Future Obligations: If you want to pay for your child's college tuition or have your spouse move to Hawaii when you are gone, you will have to estimate the costs of those obligations and add them to the amount of coverage you want. So, if a person has a yearly income of $40,000, a mortgage of $200,000, and wants to send his or her child to university (let's say this will cost $80,000), this person would probably want an $820,000 policy ($540,000 to replace yearly income + $200,000 for the mortgage expense + $80,000 university expense). Once you determine the required face value of your insurance company, you can start shopping around for the right policy (and a good deal). There are many online insurance estimators that can help you determine how much insurance you will need.
Insuring Others: Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. The death of a child, while emotionally devastating, does not constitute a financial loss because children cost money to raise. The death of an income-earning spouse, however, does create a situation with both emotional and financial losses. In that case, follow the income replacement trick we went through earlier (your spouse's income/8% + inflation = how much you'll need to insure your spouse for). This also goes for any business partners with which you have a financial relationship (for example, shared responsibility for mortgage payments on a co-owned property).

Alternatives to Life Insurance

If you are getting life insurance purely to cover debts and have no dependents, there is another way to go about it. Lending institutions have seen the profits of insurance companies and are getting in to the act. Credit card companies and banks offer insurance deductibles on your outstanding balances. Often this amounts to a few dollars a month and in the case of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, make sure to subtract that debt from any calculations you are making for life insurance - being doubly insured is a needless cost.

Summary

If you need life insurance, it is important to know how much and what kind you need. Although generally renewable term insurance is sufficient for most people, you have to look at your own situation. If you choose to buy insurance through an agent, decide on what you'll need beforehand to avoid getting stuck with inadequate coverage or expensive coverage that you don't need. As with investing, educating yourself is essential to making the right choice.

How to Shop for Life Insurance

How to Shop for Life Insurance

You'd do anything to protect your family. Yet many heads-of-household neglect the most commonplace thing they can do: Get life insurance. Of course, buying a policy may seem pretty daunting (adequately provide for your spouse and kids if you're gone? No pressure there), but the experience becomes much easier when you know some of the basic questions to ask. The following are some of the most important things to know before signing on with an insurer.

Term or Permanent Coverage

Life insurance comes in two basic categories: term policies and permanent policies.

Term policies are the easiest to understand. You pay a premium at regular intervals and, in return, get a guarantee that, if you die within a certain period or term – say, 10 or 20 years – your beneficiaries will receive a predetermined death benefit. Conversely, permanent policies offer protection for an indefinite period – as long as the owner continues to pay premiums, basically.

But that’s not the only distinction. Unlike the more straightforward term coverage, permanent policies also include a savings component.The insurer essentially takes part of your premium payment and diverts it to a separate cash account. Once the value in your account builds, you can make withdrawals or even borrow against your policy. As you might have guessed, you pay higher premiums to receive this benefit.

The permanent life category itself consists of two major types: whole life and universal life (read more about the distinction in Permanent Life Policies: Whole Vs. Universal). And within those subcategories are several variations. For example, variable universal life policies allow you to put the investable portion of your premiums into professionally managed investments, rather than relying on the fairly conservative dividends and accruals afforded by a whole life policy.

What Do You Need

But let's return to the first, fundamental question: whether to go with term or permanent coverage. Basically, the decision boils down to whether it’s better for you to build a nest egg within a life insurance plan (as a permanent policy offers) or to just pay for the bare-bones life coverage offered by a term policy, and make other savings plans.

A lot of advisors plump for the latter, quoting an old personal finance adage: “Buy term and invest the rest.” Here’s why. Permanent life insurance has significantly higher fees – and more restrictions – than your basic term coverage. The sales commission on a whole life policy can easily exceed half of your premiums for year one. So after paying into your policy for a year, you may find that its accrued cash value is still tiny. (See How Cash Value Builds In A Life Insurance Policy.)

What’s more, annual renewal fees can cost you around 7% over the next decade, further cutting into the savings portion of your policy. That makes no-load stock or bond funds look much more affordable by comparison, and their rates of return better too.

And what if you let the policy lapse within the first few years, as a sizable segment of consumers do? It's doubtful the cash surrender value will ever match the added premiums you've paid in.

Still, permanent life has its points. One of them is the fact that funds within your cash account grow tax-deferred. That's always a plus, especially if you’ve already maxed out your 401(k) plan and IRA contributions. Lump-sum death benefit payouts are not subject to income tax or, in certain cases, to estate tax, either. In fact, well-heeled families sometimes use these policies as part of a complex estate-planning strategy to reduce the impact of taxes. See Cut Your Tax Bill With Permanent Life Insurance.

Another reason for sticking with a permanent life insurance policy: You'll never be left with a sudden lack of coverage, as you might be when a term policy expires at a time when you're in poor health.

Despite their higher cost, permanent policies are considerably more popular than term policies, according to a study by LIMRA, an insurance and financial services trade association. Source: LIMRA

How Much Do You Need

Beyond the type of policy, you also have to figure out how much protection to buy. That can be a tricky task.

Some financial gurus suggest the face value of your policy be 10 times your annual salary, as a starting point. But keep in mind that there are a number of factors that could affect how much insurance your family needs. How much do you owe on your home? Do your kids go to private school? Does your spouse earn a substantial salary or have significant earnings potential if something happens to you? All of these could affect how much of a cushion you’d want to leave for your loved ones.

It may help to take an inventory of the main family expenses going forward. The resulting number should help tell you whether you need a $250,000 death benefit or a $750,000 one.

The family breadwinner isn’t necessarily the only one who needs coverage. If you’re a stay-at-home parent, your spouse may need help paying for things like childcare or housekeeping in the event of your untimely passing. Whoever is insured, you may also want to factor in the cost of a funeral or cremation services, which usually cost several thousand dollars at minimum.

‘Captive’ Agent or Independent Broker?

When it’s time to take out insurance, your first instinct might be to contact a salesperson for one of the major carriers. There are certain advantages to working with these “captive” agents, to be sure. For example, you might be able to keep multiple policies under one roof, and get a deal, if you get life insurance through the same company as your homeowners or auto insurance coverage.

But you might also think about talking to an independent agent, also known as a “broker,” who works with several different life insurance companies. By shopping your policy out to multiple providers at once, a broker can often help you find better pricing.

Going with a broker is particularly helpful if you have medical conditions such as high cholesterol or diabetes. Before offering you a policy, most carriers will have you go through medical underwriting. At the very least, that involves filling out a detailed health history form; in many cases, you’ll also have to undergo a health screening or full physical exam. While some insurers may charge you higher rates or deny your application if they consider you high-risk, an independent agent might be able to find a carrier willing to extend their standard rates.

And don’t think you have to pay more to use a broker, either. Like captive agents, they are compensated through sales commissions and policy renewal fees paid by the insurance company. (Bear that in mind, though, if a broker seems to be pushing a particular policy hard: Perhaps that company pays more generous commissions.)

Yet another route is to buy life insurance through your employer. However, you may be able to find better terms elsewhere. Plus, you can’t take your group life coverage with you, should you end up leaving your job.

The Bottom Line

Deciding between term and life insurance doesn't have to be an either/or proposition. Some consumers carry both types of coverage (see chart). Plus, many term policies are convertible to whole life at a later date. So if your needs change and you decide that you want some protection after that period, you can transition all or part of the face value to whole life coverage without going through the medical underwriting a second time.

Comparing Reverse Mortgages vs. Forward Mortgages

Reverse Mortgages vs. Forward Mortgages

If you’ve never heard of a “forward mortgage,” there’s a reason for that. The term refers to traditional mortgages and is rarely used except in comparison with its polar opposite, the “reverse mortgage.” So, which way do you want to go? Whether you go forward or in reverse depends upon where you are at this point in your life, personally and financially.

Before going any further, it should be noted that only people age 62 and above are eligible to get a reverse mortgage. And, 62 is young to get one. The older you are, the more money the bank will be willing to lend to you.

If you are under 62, the closest equivalent to a reverse mortgage for you is the secured line of credit. This is a set amount of money that you can draw upon at any time, for any reason. Be very careful. You’re betting your house on your ability to repay that money, with interest. In the old days, this was commonly known as a “second mortgage.”

That said, both forward and reverse mortgages are essentially huge loans that use your home as collateral – and they're major financial commitments. A couple might use a single home as collateral twice in a lifetime, getting first a forward mortgage at purchase and then, decades later, a reverse mortgage. Here’s how it works:

A married couple, each about 30 years old, buys a home with a small down payment. They are promising to pay the money back in small monthly increments of principal plus interest over a period of years. Thirty years has traditionally been the standard.

More than 30 years later, the same couple is living in the same house, having paid off the mortgage in full. Even with their combined Social Security benefits and retirement savings, it’s difficult to make ends meet. So, they go for a reverse mortgage. They’ll pay nothing up front and get a monthly check to supplement their income. In fact, they never pay off the mortgage, or the interest and costs that accrue over the years. But in the future, their heirs must, either by selling the family home or in a lump sum.
These are straightforward examples. The variations are pretty much limitless, but there are pitfalls to consider in each. For example:

Risks in a Forward Mortgage

You may get a better interest rate, and save a substantial amount in interest over time, if you go for a 15-year or even a 10-year mortgage. (See The Pros And Cons Of A 15-Year Mortgage.) That takes a fair degree of confidence that your income and expenses will stay steady or improve in the years to come. You might also consider getting the 30-year mortgage, and making extra payments when you can. That enables you to whittle away at your debt, and reduce your overall interest payment, without the burden of a higher required payment.

The mortgage system is based on the assumption that real estate increases in value over time. That truism proved false when the housing bubble burst in 2008. As of April 2015, more than 7.3 million American homes, or about 13.2% of all homes with mortgages, were still “seriously underwater,” according to a RealtyTrac survey. That means their owners must continue to pay inflated mortgages, or pay their banks 25% or more above their homes’ assessed value when they sell.

Speaking of getting into trouble, during the housing boom it became common for homeowners to obtain a “line of credit,” using their home as collateral, in addition to their mortgages. Both the homeowners and their bankers assumed that the big increases in home values would just keep going. When the bust came, homeowners got stuck holding the double debt, for the mortgage and the line of credit. About 40% of those who had home equity loans were underwater as of the latest figures available, from 2011. That’s twice the overall percentage who were underwater.

Risks in a Reverse Mortgage

As this guide from The National Council on Aging shows, the reverse mortgage is regulated by the federal government in order to prevent predatory lenders from snaring senior citizens. (See Rules For Obtaining an FHA Reverse Mortgage.) But it can’t prevent senior citizens from fooling themselves. For instance:

A homeowner who obtains a flat-rate reverse mortgage gets the entire amount of the loan at settlement, with no restrictions on its use. The expectation is that they will pay off their outstanding debts and use any remaining funds to supplement other sources of income. The temptations are obvious.

If a homeowner goes for a flexible-rate mortgage, the money may be taken out in a lump sum, or a monthly annuity, or a combination of both. It, too, is entirely flexible. Any money not taken out at the settlement is available as a line of credit. Again, temptation looms.

The accumulated debt and interest on a reverse mortgage, plus costs, is due when the mortgage holder moves, sells the home or dies. That means you or your heirs have to cough up a large sum of money, one way or another, and fast. The standard grace period is six months.

There is one consumer-friendly note, though, in these uncertain times: The bank may not demand a payment that exceeds the value of the home. The bank recoups the loss through an insurance fund that was one of the costs of that mortgage.

The Bottom Line

If this seems to add up to a lot of risks, there’s still the big reward of living in a home you own in an era in which few can afford to pay all-cash down. Both the standard forward mortgage and the reverse mortgage allow many of us to do just that, at two key stages of our lives. Armed with the facts, and some common sense about spending, you can take advantage of them safely.

Life Insurance Options

Life Insurance Options

If you are interested in life insurance, any insurance salesperson will be delighted to explain the bewildering array of policies available to you. However, unless you educate yourself first, it's all too easy to get mesmerized by insurance lingo and end up paying too much for a policy that may not meet your needs.

Term Insurance

Term insurance provides a preset amount of cash if you die while the policy is in force. For example, a five-year $130,000 term policy pays off if you die within five years -- and that's it. If you live beyond the end of the term, you get nothing. With term insurance, you pay only for life insurance coverage. The policy does not develop reserves.

It's inexpensive if you are younger. Term insurance is the cheapest form of coverage over a limited number of years, especially when you're younger. It is particularly suitable for younger parents who want substantial insurance coverage at lower cost. Since the risk of dying in your 20s, 30s or 40s is quite low, the cost of term insurance during these years is as reasonable as life insurance prices get.

It's good if you need insurance for a short time period. Also, if you need insurance for only a short time, say to qualify for a business loan, term is your best bet.

The older you get, the more expensive it is. However, the older you are, the more expensive term insurance premiums become compared to the payoff value of the policy. This, of course, is understandable, as the older you are, the greater the chance you will die during the policy term.

Differences between term policies. Term policies offered by different companies have all sorts of differences, some fairly significant. For example, some policies are automatically renewable at the end of the term without a medical examination, often for higher premiums, and some are not. Some have premiums set for a period of years, but others guarantee a premium rate for only the first year. After that, the rate can go up. Some can also be converted from a term to whole life or "universal" policy during the term, again without needing to requalify.

But remember, with term insurance you never lock in the right to maintain the policy no matter how old you become. If you want to ensure that insurance will continue in force for your entire life, term isn't for you.

Permanent Insurance

Permanent insurance is much more expensive than term insurance. Why buy it? Because it can never be canceled as long as you pay the premiums, and because it's also an investment.

How permanent insurance works. With a permanent policy, your premium payments for the first few (or more than a few) years cover more than the insurance company's cost of your risk of death. The excess money goes into a reserve account, which is invested by the insurance company. Unless the company is disastrously managed, these investments yield returns in the form of interest or dividends. A proportion of these are passed along to you. You can add these returns to your policy reserves or borrow against them, after a set time. And if you decide to end the policy, you can cash it in for the "surrender value."

Tax benefits. Returns that accumulate are not taxable, unless the money is actually distributed to you. Certain partial withdrawals can even be made without paying tax. By contrast, the interest on bank accounts is subject to tax in the year it is paid, even if left untouched in the account.

Investment should not be your sole purpose. However, although permanent insurance policies do function as an investment, maximizing your investment return is not the purpose of insurance. If that's what you want, you'd probably do better buying cheaper term insurance and putting the money you save in other tax-deferred investments.

Getting Rid of Private Mortgage Insurance

Getting Rid of Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) protects the lender in the event that you default on your mortgage payments and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Unfortunately, you foot the bill for the premiums, and lenders almost always require PMI for loans where the down payment is less than 20%. They add the cost to your mortgage payment each month, in an amount based on how much you've borrowed. The good news is that PMI can usually be canceled after your home's value has risen enough to give you 20% to 25% equity in your house.

When the Law Requires a Lender to Cancel PMI

Some baseline rules about cancellation were established by the federal Homeowners' Protection Act, which applies to people who bought their homes after July 29, 1999. The Act says that you can ask that your PMI be canceled when you've paid down your mortgage to 80% of the loan, if you have a good record of payment and compliance with the terms of your mortgage, you make a written request, and you show that the value of the property hasn't gone down, nor have you encumbered it with liens (such as a second mortgage). If you meet all these conditions, the lender must grant your request to cancel the PMI.

What's more, when you've paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI. But don't count on the lender to notice -- keep track of the date yourself. Unfortunately, it may take years to get to this point. Thanks to the wonders of amortization, your schedule of payments is front-loaded so that you're mostly paying off the interest at first.

When You Can Get Your PMI Canceled

Even if you haven't paid down your mortgage to one of these legal limits, you can start trying to get your PMI canceled as soon as you suspect that your equity in your home or your home's value has gone up significantly, perhaps because your home's value has risen along with other local homes or because you've remodeled. Such value-based rises in equity are harder to prove to your lender, and some lenders require you to wait a minimum time (around two years) before they will approve cancellation of PMI on this basis.

How to Get Your PMI Canceled

The exact procedures for getting your lender to cancel your PMI are largely in the hands of your lender -- or, to be more accurate, in the hands of the company from whom your lender buys the insurance (though you'll never deal with that company directly). You'll most likely need to:

• Contact your lender to find out the appropriate PMI cancellation procedures. It's best to write a letter to your mortgage lender, formally requesting guidelines.


• Get your home appraised by a professional to find out its current market value. Your lender may require an appraisal even if you're asking for a cancellation based on your many payments, since the lender needs reassurance that the home hasn't declined in value. Although you'll normally pay the appraiser's bill, it's best to use an appraiser whom your lender recommends and whose findings the lender will therefore respect. (Note: Your tax assessment may show an entirely different value from the appraiser's -- don't be concerned, tax assessments often lag behind, and the tax assessor won't see the appraiser's report, thank goodness.)


• Calculate your "loan to value" (LTV) ratio using the results of the appraisal. This is a simple calculation -- just divide your loan amount by your home's value, to get a figure that should be in decimal points. If, for example, your loan is $200,000 and your home is appraised at $250,000, your LTV ratio is 0.8, or 80%.


• Compare your "loan to value" (LTV) ratio to that required by the lender. Most lenders require that your LTV ratio be 80% or lower before they will cancel your PMI. Note: Some lenders express the percentage in reverse, requiring at least 20% equity in the property, for example. When your LTV ratio reaches 78% based on the original value of your home, remember that the Homeowners' Protection Act may require your lender to cancel your PMI without your asking. If the loan to value ratio is at the percentage required by your lender, follow the lender's stated procedures for requesting a PMI cancellation. Expect to have to write another letter with your request, stating your home's current value and your remaining debt amount, and including a copy of the appraisal report.

Want to know aabout : Difference of PMI and Mortgage Protection Insurance

If Your Lender Refuses to Cancel the PMI

Most lenders recognize that there's little point in requiring PMI after it's clear that you're making your mortgage payments on time and that you have enough equity in your property to cover the loan if the lender has to foreclose. Nevertheless, many home buyers find their lenders to be frustratingly slow to wake up and cancel the coverage. The fact that they'll have to spend time reviewing your file for no immediate gain and that the insurance company may also drag its feet are probably contributing factors.

If your lender refuses, or is slow to act on your PMI cancellation request, write polite but firm letters requesting action. Such letters are important not only to prod the lender into motion, but to serve as evidence if you're later forced to take the lender to court. If court action becomes your best option, small claims court can be a good avenue, and you won't need a lawyer to accompany you. For more information, including how to write polite but forceful demand letters, see Everybody's Guide to Small Claims Court, by Ralph Warner .

Difference Between PMI and Mortgage Protection Insurance

Difference Between PMI and Mortgage Protection Insurance

Many homeowners are confused about the difference between PMI (private mortgage insurance) and mortgage protection insurance. The two are very different -- and it's important to understand the distinction between them.

It is not uncommon for homeowners to mistakenly think that PMI will cover their mortgage payments if they lose their job, become disabled, or die. However, this is not the case. PMI is designed to protect the lender, not the homeowner.

Mortgage protection insurance, on the other hand, will cover your mortgage payments if you lose your job or become disabled, or it will pay off the mortgage when you die. Read on to learn more about the difference between PMI and mortgage protection insurance.

Private Mortgage Insurance (PMI)

PMI is designed to reimburse a mortgage lender if you default on your loan and your house isn't worth enough to entirely repay the debt through a foreclosure sale. PMI has nothing to do with job loss, disability, or death and it won’t pay your mortgage if one of these things happens to you.

If your down payment on your home is less than 20%, your lender will most likely require you to get PMI. When you reach the point where the loan-to-value ratio is 80%, contact your mortgage servicer (the company you make your payments to) and let it know that you would like to discontinue the PMI premiums. Pursuant to federal law, a lender must inform you at closing how many years and months it will take for you to reach that 80% level so you can cancel PMI. (For more information, see Nolo's article Getting Rid of PMI (Private Mortgage Insurance.)

Even if you do not request a cancellation of PMI, the lender must automatically cancel it once the loan-to-value ratio gets to 78%. (However, if the Federal Housing Administration insures your loan, PMI is required for the life of the loan if the loan-to-value was 90% or greater at the time of origination, which is true for the majority of loans.)

The cost of PMI varies, but is usually around one half of 1% of the loan amount, so it is well worth the effort to get rid of it as soon as you can, if you can. Also, keep in mind that mistakes often happen and the lender may not remember to cancel PMI once your loan-to-value ratio gets to 78% without you reminding them.

Mortgage Protection Insurance

Mortgage protection insurance, unlike PMI, protects you as a borrower. This insurance typically covers your mortgage payment for a certain period of time if you lose your job or become disabled, or it pays it off when you die.

Also unlike PMI, this type of insurance is purely voluntary. If you are in good health, relatively secure in your job, have no unusual lifestyle risks, and are adequately otherwise insured (for example, you have life insurance), you may not want or need to purchase this type of insurance. (Learn more about life insurance in Nolo’s article Life Insurance Options.)

Average Cost of Private Mortgage Insurance

Average Cost of Private Mortgage Insurance

Private mortgage insurance, or PMI, reimburses the lender if the borrower defaults on the loan. The private mortgage insurance paid by home-loan borrowers allows lenders to offer mortgages to many buyers who would not otherwise qualify for a loan.

Defaults

At one time, mortgages carried a minimum down payment, usually 20 percent of the purchase price. The down payment was meant to ensure that the buyer would honor the loan commitment, as defaulting would mean the loss of a large investment. In theory, with at least 20 percent equity in the home from the start of the loan, a lender would be able to recover at least this amount by selling the home, if necessary, after a foreclosure.

Down Payments

PMI has been available to buyers and lenders since the late 1950s. It is usually required by lenders when the borrower makes a down payment smaller than the traditional minimum of 20 percent. The PMI contract is available on conventional loans that are not backed by guarantees of the Federal Housing Administration, the Department of Housing and Urban Development or the Veterans Administration. Loans guaranteed by these public agencies do not require PMI and instead levy their own insurance premiums on borrowers.

Up-Front Premiums

In the past, PMI was charged as an upfront cost to the borrower. According to the 1997 article “Understanding the Cost of Private Mortgage Insurance,” by L. Lee Colquitt and V. Carlos Slawson, published by the online journal Business Quest, these premiums amounted to 2.2 percent of the loan amount in the early 1990s, representing a substantial cost to anyone borrowing money with the use of a conventional loan.

Payments

Most borrowers now pay the PMI premium as part of the monthly mortgage payment. The PMI rate is figured as a percentage, usually around 1 to 2 percent, of the outstanding principal amount of the loan, divided into twelve monthly payments. On a loan amounting to $150,000 in principal, the annual premium at the PMI rate of 1 percent is $1,500, or $125 a month.

Loan-to-Value

Generally, the higher the loan-to-value ratio, the more expensive the PMI premiums as a percentage of the initial mortgage amount. For example, for a loan in which the borrower has made a 10-percent down payment, the loan-to-value ration is 90 percent the PMI may be about .75 percent of the initial mortgage amount; a loan with an 85-percent loan-to-value may charge around .50 percent.

Cancellation

By the Homeowners Protection Act of 1998, the borrower is allowed to request and receive a cancellation of PMI when the loan principal amount reaches 80 percent of the home's selling price. The lender is required to notify you at the closing of the loan when the 80-percent ratio will be reached if you make the monthly principal and interest payments as scheduled. Some borrowers considered high-risk may be charged PMI down to a 50-percent loan-to-value ratio.

Removing private mortgage insurance

Removing Private Mortgage Insurance

If you bought a house with a down payment of less than 20 percent, your lender required you to buy mortgage insurance. Likewise if you refinanced with less than 20 percent equity.

Mortgage Insurance

Mortgage insurance reimburses the lender if you default on your home loan. You, the borrower, pay the premiums. Often known as private mortgage insurance, or PMI. The Federal Housing Administration, a government agency, sells mortgage insurance, too.

Private mortgage insurance is expensive, and you'll be eager to remove it as soon as possible, once your loan balance is 80 percent or less of the home's value. (While you can cancel private mortgage insurance, you cannot cancel recent FHA insurance.)

No more mortgage insurance

Here are steps you can take to cancel mortgage insurance sooner or strengthen your negotiating position:

• Get a new appraisal: Some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding whether you meet the 20 percent equity threshold. An appraisal generally costs $300 to $500.


• Prepay on your loan: Even $50 a month can mean a dramatic drop in your loan balance over time.


• Remodel: Add a room or a pool to increase your home's market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure.

Know your rights

By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel mortgage insurance.

Most homebuyers ask that mortgage insurance be canceled once they pay their loan balance down to 80 percent of the home's original appraised value. When the balance drops to 78 percent, the mortgage servicer is required to cancel mortgage insurance. Mortgage servicers also must give borrowers an annual statement that shows whom to call for information about canceling mortgage insurance.

Getting down to 80 or 78 percent

To calculate whether your loan balance has fallen to 80 or 78 percent of original value, divide the current loan balance (the amount you still owe) by the original appraised value (most likely, that's the same as the purchase price).

Formula: Current loan balance / Original appraised value

Example: Dale owes $171,600 on a house that cost $220,000 several years ago.

$171,600 / $220,000 = 0.78.

That equals 78 percent, so it's time for Dale's mortgage insurance to be canceled.

Other requirements to cancel PMI

According to the Consumer Financial Protection Bureau, you have to meet certain requirements to remove PMI:

• You must request PMI cancellation in writing.


• You have to be current on your payments and have a good payment history.


• You might have to prove that you don't have any other liens on the home (for example, a home equity loan or home equity line of credit).


• You might have to get an appraisal to demonstrate that your loan balance isn't more than 80 percent of the home's current value.

If at first you don't succeed ...

If you can't persuade your lender to drop mortgage insurance, consider refinancing. If your home value has increased enough, the new lender won't require mortgage insurance. Make sure, however, that your refinance costs don't exceed the money you save by eliminating mortgage insurance.

Lenders can impose stricter rules for high-risk borrowers. You may fall into this high-risk category if you have missed mortgage payments, so make sure your payments are up to date before asking your lender to drop mortgage insurance. Lenders may require a higher equity percentage if the property has been converted to rental use.

E-insurance to see big numbers as LIC joins in

E-insurance to see big numbers as LIC joins in

Life Insurance Corporation of India, the country’s largest insurer, has decided to issue digitised policies, after resisting such a move for some years.

India First Insurance launched the first digitised policy in September 2013. Less than two per cent of the policies sold in the country are in electronic format.

LIC was not keen due to the costs involved, apart from the fact that external technology was being used to digitise. Now, LIC has finally become part of the e-insurance process, where policies will be digitised through repositories. S K Roy, LIC chairman, told Business Standard that after several discussions, they’d decided to go ahead in this regard.

An insurance repository is a facility to help policy holders buy and keep policies in electronic form, rather than as a paper document. These repositories, like share depositories or mutual fund transfer agencies, would hold electronic records of policies issued to individuals. These are called 'electronic policies' or 'e-policies’, held in an electronic insurance account.

It is also being proposed that all high-value policies be mandatorily in digitised form. Different insurers will have different arrangements with each repository but, on an average, the cost of digitisation could be Rs 75-80 per person. There is also an annual servicing fee of Rs 500-900. These costs will be borne by insurers.

Insurers have been engaged in active campaigns to highlight the importance of holding insurance in a digital format, which protects a policy document from damage or loss, leading to possible claim rejection. The sector regulator's estimates suggest Rs 150-200 per customer is spent by a company annually in maintaining policies in physical form. The digital initiative, pushed by the Insurance Regulatory and Development Authority of India, is expected to save at least Rs 100 crore a year for the sector.

The five insurance repository companies are NSDL Database Management, Central Insurance Repository, CAMS Repository Services, SHCIL Projects and Karvy Insurance Repository.

These repositories are required to maintain records of e-insurance accounts with a unique number, records of e-insurance policies issued and of reconversion to physical form, an index of policy holders and their nominees/ assignees/beneficiaries in the respective life insurance policies, among others. They also have to maintain a history of claim data.

Further, premier services can also be offered, on an annual or per service basis. These include a premium dues calendar and online premium payment facilitation, premium history and claims history, acceptance of service requests for onward transmission to insurers and tracking systems for service requests or grievances.

---

HOW TO DIGITISE A POLICY

• Fill out application policy, that can be downloaded from repository website


• Insurers also have these forms available


• Submit form with identity and address proof


• PAN number or Aadhaar number is compulsory for identity proof


• Address proof can be ration card, voter id card and passport among others


• Takes 2-7 days to open the account


• An e-Account number is generated for each customer for free


• Premiums services like online premium payment will be chargeable


• Each user can have an authorised representative for account.


• In case of user's death, representative will be able to provide information about the policies

FHA to lower cost of mortgage insurance

FHA to Lower Cost of Mortgage Insurance

In a move designed to bring more first-time homebuyers into the housing market, President Barack Obama said Wednesday the Federal Housing Administration (FHA), the government insurer of home loans, will lower its annual insurance premiums from 1.35 percent to 0.85 percent.

In a statement, the White House said the move was part of the president's efforts `"to expand responsible lending to creditworthy borrowers.'' The president is scheduled to talk about improvements in the housing market at a speech on Thursday in Phoenix, one of the hardest-hit markets of the housing crash.

Stocks of the nation's home builders rose on the news Wednesday, while those of mortgage insurers fell.

"This action will make home ownership more affordable for over two million Americans in the next three years," said Julián Castro, U.S. Department of Housing and Urban Development Secretary. "Since 2009, the Obama administration has taken bold steps to reduce risks in the mortgage market and to protect consumers. These efforts have made it possible to take this prudent measure while also ensuring FHA remains on a positive financial trajectory. By bringing our premiums down, we're helping folks lift themselves up so they can open new doors of opportunity and strengthen their financial futures."

Mortgage bankers praised the decision. "It couldn't come at a better time," said David Stevens, CEO of the Mortgage Bankers Association. "February is the beginning of the spring market. I think it will have a definitive impact particularly in the first-time homebuyer market."

For the typical FHA applicant, the reduction in premiums means a savings of about $80 on their monthly payment, according to CoreLogic's chief economist, Sam Khater.

"So it's positive news from a consumer welfare perspective, especially for first-time homebuyers, which account for the majority of FHA's business," he said, adding, "However, I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc. Changes in affordability only impact how much home they can buy."

The FHA had been the only low down payment product available, with a minimum 3.5 percent down, but recently Fannie Mae and Freddie Mac announced a new 3 percent down payment product that would require private mortgage insurance. The product would compete directly with the FHA and could have offered some borrowers a cheaper option if they had a good credit score.

"We believe the cut is strategic. Our view is that FHA was at risk of losing enough market share—especially of higher-quality borrowers—to the GSE 97 percent down mortgage that it could have put at risk the ability of the FHA fund to reach its 200 basis point reserve requirement this year as it had forecast. By cutting the premium, FHA would increase its share of the market and should be back on track to meeting the reserve requirement despite the cut in revenue," wrote Jaret Seiberg, an analyst at Guggenheim Partners.

The reduction will likely come under scrutiny by some on Capitol Hill, as the FHA is still building its capital reserves and is not yet above the mandatory 2 percent minimum. It is back in the black, after having bled cash for two years.

The FHA's volume had soared at the beginning of the housing crash, making up for the lack of credit in the private market, but that came at a price. In order to rebuild its fund, it more than doubled its annual insurance premium and raised average credit scores. That made it harder for borrowers today to afford an FHA loan.

Lowering the premium will bring volume back to the FHA, but it will also bring back risk.

"That is clearly the tension with any lending program that encourages low down payment," said Stevens. "But we are in a different position. We are clearly in an environment where home prices are very stable with steady growth. You don't have the dynamics to create any type of housing bubble."

Mortgage volume has been lagging, even with interest rates falling to near record lows. The Obama administration is clearly looking for new ways to boost homeownership, as investor activity wanes and the market is left to mortgage-dependent buyers.

"Now that we've made it harder for reckless buyers to buy homes that they can't afford, let's make it a little bit easier for qualified buyers to buy the homes that they can afford," said Obama in an August 2013 speech, also in Phoenix. At the time he did not make mention of the FHA, which was still in the red, but instead touted refinance programs and less red tape for lenders.

Obama is also expected to address the issue of putbacks at the FHA, which is when lenders are forced to buy back bad loans. The regulator of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency, has already sought to clarify these rules, which have created huge costs for lenders and consequently higher costs for borrowers.

How Do I Figure Out My House Payment With Insurance & PMI?

How Do I Figure Out My House Payment With Insurance & PMI?

When purchasing a home, you have many financial figures to consider to make sure that you stay within your budget. A lender may require that you purchase private mortgage insurance (PMI) if your mortgage involves a down payment of less than 20 percent. In addition to purchasing PMI, you also must include homeowner’s insurance in your monthly payment to protect yourself from loss from property damage. Figure out your house payment with insurance and PMI as you plan your budget.

Step By Step:

1.Write down the annual percentage rate (APR), the term of the mortgage and the principal loan amount on a piece of paper.

2.Divide the APR by 1,200 to find your rate. For example, if your APR is 6 percent, divide 6 by 1,200 to get 0.005.

3.Multiply the term of the mortgage by 12 to find the number of months. For example, if the term is 15 years, multiply 15 * 12 = 180.

4.Use the following equation to figure your monthly mortgage payment: Rate / [(1 + Rate ^Months) -1] + Rate * Principal = Monthly Payment. Using the same example, a $300,000 mortgage at 6 percent APR over a 15-year period will be $2,531.57 per month.

5.Find out the PMI rate from the lender. Multiply this rate by the principal to determine the PMI amount for your loan. For example, with a $300,000 principal and a PMI rate of 1 percent, your annual PMI would be $3,000. Divide this annual amount by 12 to find your monthly PMI payment--$250 for this example.

6.Find the best homeowner’s insurance coverage and rates you can afford. While the lender will require you to purchase homeowner’s insurance to cover the amount of your mortgage, you should purchase enough insurance to enable you to replace your home and everything inside it in the event of a disaster. This rate will be between 0.5 percent and 1 percent of your home value. Divide this annual homeowner’s insurance cost by 12 to find the monthly payment you must make.

7.Add your monthly mortgage payment, the monthly PMI payment and the monthly homeowner’s insurance payment together to find the amount of your monthly house payment.

MORTGAGE INSURANCE

MORTGAGE INSURANCE

Mortgage Insurance (PMI) – Mortgage insurance simply stated is a private insurance policy that protects the Lender or Investors in case of a mortgage loan default. Private Mortgage insurance (PMI) may be required by the Lender when the loan amount exceeds 80% of the appraised value or purchase price of the home. Another way of explaining it is when the down payment for a purchase of a home is less than 20%, PMI is required. See below for a description of FHA Mortgage Insurance (MIP).

 HOW DO I PAY THE PREMIUM ON MORTGAGE INSURANCE (PMI)?

With PMI, the entire amount of the insurance premium for the year is paid upfront at closing and in most cases can be financed. In addition, a monthly mortgage insurance premium is added to your monthly mortgage payment so that at the end of 12 months, you have the following year’s PMI paid.

WHAT FACTORS DETERMINE MORTGAGE INSURANCE (PMI)?

The required amount of PMI coverage is determined by factors like the loan term, loan type, and loan to value (LTV). LTV is defined as the loan amount divided by the appraised value of the home

CAN I CANCEL PMI?

Yes, in most instances, the PMI can be canceled when the loan to value (LTV) reaches a certain amount. Contact your Loan Officer for additional information.

How Do I Calculate PMI Mortgage Insurance?

How Do I Calculate PMI Mortgage Insurance?

PMI stands for "private mortgage insurance." Real estate mortgage companies usually demand that borrowers take out PMI if they pay less than 20 percent of the home's value as a down payment. The PMI lender will pay the mortgage lender if the borrower defaults on the loan. You can calculate PMI with a calculator or by using a formula. The PMI formula is actually simpler than a fixed-rate mortgage formula.

1.Find out the loan-to-value, or LTV, ratio of your house. The "L" is the amount of money you are borrowing versus the "V," or the value of your home. For example, if your home is worth $500,000 and you only put down $50,000, then you owe the mortgage company $450,000. Find the LTV ratio by dividing the loan amount by the home's value. Then multiply the answer by 100. 450,000 / 500,000 = 0.9 0.9 X 100 = 90 percent LTV

2.Look at the lender's PMI table. Lenders figure out how much PMI you need to pay by consulting the chart. For example, an LTV of 90 percent may warrant a PMI of 0.0075 percent.

3.Multiply your mortgage loan by your specific PMI rate according to the lender's chart. For example: 450,000 x 0.0075 = $3,375 You would owe $3,375 a year for the PMI.

4.Divide the yearly PMI amount by 12 to find out your monthly PMI amount. For example: $3,375 / 12 = $281.25 per month

Do you need income protection insurance?

Do you need income protection insurance?

No one likes to think that something bad will happen to them. But each year close to a million people find themselves unable to work due to a serious illness or injury. If you couldn’t work due to a serious illness, how would you manage? Could you survive on savings, or on sick pay from work? If not, you’ll need some other way to keep paying the bills – and you might want to consider income protection insurance.

What is income protection insurance?

Income protection insurance is a long-term insurance policy to help you if you can’t work because you’re ill or injured.

• It replaces part of your income if you can’t work because you become ill or disabled.


• It pays out until you can start working again, or until you retire, die or the end of the policy term - whichever is sooner.


• There’s a waiting period before the payments start. You generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly payments.


• It covers most illnesses that leave you unable to work, either in the short or long term (depending on the type of policy and its definition of incapacity).


• You can claim as many times as you need to, while the policy lasts.

It’s not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness.

It’s not the same as short-term income protection, which also pays out a monthly sum related to your income, but only for a limited period of time (normally between two and five years) and can cover fewer illnesses or situations.

Do you need it?

According to the ABI, one million workers a year find themselves unable to work due to a serious illness or injury.

It doesn’t matter whether or not you have children or other dependants – if illness would mean you couldn’t pay the bills, you should consider income protection insurance.

You’re most likely to need it if you’re self-employed or employed and you don’t have sick pay to fall back on.

Who doesn’t need it?

You might not need income protection insurance if:

• You could get by on your sick pay – for example if you have an employee benefits package which gives you an income for 12 months or more.


• You could survive on government benefits – but they might not be enough to cover all your outgoings


• You have enough savings to support yourself – remember that your savings may need to see you through a long period.


• You could take early retirement – if you’re near retirement age, perhaps you could afford to retire early. If you are unable to return to work you may be entitled to take your pension early.


• Your partner or family would support you – perhaps your partner has enough income to cover everything the two of you need.

How much does it cost?

How much you pay each month will depend on the policy and your circumstances. Usually income protection insurance covers a wide range of illnesses and situations and has the potential to pay out for many years.

The cost of a policy will vary based on a number of factors, including:

• Age


• Whether you smoke or have previously smoked


• Health (your current health, your weight, your family medical history)


• Job


• The percentage of income you’d like to cover

Other types of insurance to consider

There are also several other insurance products you can use to protect yourself from money problems if you’re ill or injured or if you die and you want others to be protected.

Do you need life insurance? This product provides some financial support to your dependants if you die.

Do you need critical illness insurance? This type of policy will provide you with a tax-free ‘lump sum’ if you’re diagnosed with a serious illness covered by your policy.

Do you need payment protection insurance? Payment protection insurance will cover selected payments, such as your mortgage, if you can’t work because you’re ill, had an accident or get made redundant.

Top Providers Of Income Protection Insurance From United States

Top Providers Of Income Protection Insurance From United States

In this guide we will discuss about the top providers of income protection insurance from the country of United States

Combined Insurance

This insurance provider in the USA for the income protection insurance is one of the leaders in the market when it comes to the supplementary insurance. The prime focus that this company has in its line of business is the understanding of the requirements of the various individual as well as the business customers when it comes to the provision of the income protection insurance. They shall help the customers of theirs in order to find the right coverage that is present at a very good value. They have an understanding that the choosing between the various policies in the supplemental insurance can be a very daunting as well as a confusing task for the customers of theirs. But apart from any other thing they are much more focused on the business needs that prevail more than anything else in the protection that is caused via the income protection insurance.

Even though it is hard for any company in the insurance sector of USA in order to find the best policy in the insurance related to the income protection, they have come up with some policies that can be customized for the insurance needs of the various businesses in the income protection. There is a difficulty in order to make a distinction between the several of the insurance policies. This is the same reason that the combined insurance is there in the business sector of insurance in USA. They make the choices and the other related tasks very different for their customers so that they have no problem whatsoever when it comes to finding the perfect insurance policy. They shall provide the protection to the family of their clients when they are in the utmost need of the same. They believe in making things easier in the income protection insurance division.

Private Health Associates USA

This company of the USA that deals with the health insurance and the related medical coverage has a business which is also dedicated in terms of the insurance for the people who suffer from the disability and require the income protection insurance. This company of the USA underwent the licensing procedures in the year 1991. This is a company which is proud in order to be the member of the National Association of Insurance and also the Financial Advisors. They have the comprehensive income protection insurance programs that have an inclusion of the per individual annual plans as well as the coverage that is provided if suppose an income gets hampered or interrupted by means of a reason which is covered under their policies. They make the provision of the variety of the different sets of the coverage that is present on both the National as well as the International basis.

This is a company that has been having a very much firm belief that the solutions must be available readily in order to make the insurance of the different types of the risks that are available. They have a virtual agency that makes a provision of the confidential outlet for the insurance needs in the USA for the protection of the income. They also provide the financial products to both the business as well as the professional clients of theirs that is present on the worldwide basis. They are involved into the management and the administration of all the aspects of the quality that is incorporated in the income protection plans of theirs. This insurance provider of the USA in the income protection sector is one of the leading providers of the insurance policies.

Erie Insurance

This financial services company in the insurance sector of USA nation adheres to the underwriting that is of the disciplined nature. They keep their prices of the insurance quotes in the protection of the income. They have an investment policy in the USA for the insurance that is on the prudent basis. They make the provision of the continual cover for up to more than over 12 months. They have an aim in order to make a provision of the cover of the insurance that is responsible for the provision of the value to its customers. They have some of the tactics of doing the business in the USA related to the income protection insurance that has been able to successfully contribute to the ability of theirs in order to have an earning of the consistently getting the ratings that are superior. They are a very much professional service along with their combination of the quality in the agency force. They are committed to the customers of theirs who are or have availed the income protection insurance by their much appreciated customer service. They deal with both the business partners as well as the customers. They made their way in the establishment in the year 1991. They are based in Pittsburgh in USA.

Do I need to take out a Funeral Insurance

Do I need to take out a Funeral Insurance

Typical plan features

Funeral plans come in three forms: 1) Individual cover, 2) Family cover, and 3) Cover for Parents where age is a vital factor to the product.

 

Typical cover can range from as little as R5,000 to R50,000. Funeral Plans pay out a tax-free cash lump sum for funeral expenses, so it is also called burial insurance.

 

The premiums to be paid are directly dependent on the level of cover and age of the insured. For R5,000 cover one can expect to pay around R12 a month at the low end of the spectrum, and for R50,000 cover expect to pay over R100 a month − all entirely age dependant. The older one is the higher the premium.

 

Purpose of Funeral Plans

A funeral plan is designed to ease the financial burden during a difficult time by contributing towards the cost of a funeral on the death of the insured person/s by providing the nominated beneficiary with a lump sum payment;

 

Also, many of the products on the market cover more than just funeral expenses. There are smaller benefits that come with the product. These benefits vary from one company's product to another.

 

A funeral plan pays out a lump sum on the death of the insured or extended family covered by the policy. The money can then be used at the beneficiary's discretion for funeral arrangements etc.

 

Why take out a funeral plan

We work and save during our lives, to protect and grow our investments for rainy days, educating our children and maintaining our home. But death is also a real expense. Funeral cover emerged to protect and save people from the high cost of a funeral.

 

Ideally one does not want to use money from savings that are meant for the above plethora of life's needs. That is why funeral cover is so important − especially for low to middle income South Africans. It keeps us on the path to financial security by specifically easing the burden of funeral costs.

Key considerations

Your assets available will determine whether a funeral plan is important for you or not. Ask yourself if you can afford to pay for a funeral and all the arrangements that go with it − and if the money is readily available on short notice.

 

If not then a funeral plan will dramatically increase your peace of mind and capacity to deal with a very traumatic experience in a person's lifetime.

 

It is thus very important to ask these questions today, to best prepare you for the future.

 

Funeral cover is reasonably clear and simple to understand. The companies that offer this type of cover generally have two or more options for you to consider. They will typically vary the level of cover and thus adjust the premium accordingly. The choice you make is as to your preference. Think carefully and do your research before accepting the policy.

 

The following Funeral Plan criteria are very important to look out for:

 

Timely pay-outs

According to the Association for Savings and Investment SA (ASISA), one of the key features of funeral insurance is that the benefit is paid out very quickly, often within 24 to 48 hours.

 

This is necessary because the benefit is designed to cover the cost of the funeral. Therefore very little claims information is required, often only a death certificate.

Check that your product provider will pay out within 48 hours or less! This is very important. But note that there are many complaints to the Ombud regarding this promise.

 

Cover, Term, and Premiums

Cover amounts must be stipulated clearly and what the cost to you is, in the form of monthly premium.

 

Funeral benefits are a specific 'insurance class' as defined in the Long-term Insurance Act and the maximum benefit that can be paid is currently R30,000 from ages 7 and above.

 

The product is usually sold for a fixed term, for example 10 years, or for the life-time of the insured and premiums are paid for the benefit term.

 

Premiums are usually not guaranteed and may be increased should the insurer feel that the premiums are insufficient to cover the claims and expenses.

 

Standard funeral products require you to pay monthly premiums, whilst Prepaid Funeral Cover products accept once off premiums − where you pay one upfront premium for let's say, 6 to 12 months cover. You are then obliged to pay a top-up premium after that term to keep your cover continuous.

Waiting Periods

Due to the fact that very little or no underwriting is done on funeral benefits, it is usual to have a waiting period during which no (or a reduced) benefit will be paid. The waiting period will typically be six months but can vary substantially from one product to the next, warns ASISA.

 

Underwriting is a process undertaken by the insurer to actively assess their risk. They may require further information from you, take that into account, and adjust your premium according to the corresponding risks.

 

Plan options

Cover types, can be in the form of individual cover for yourself, for your immediate family or your parents and/or parents in-laws.

 

Additional benefits

Funeral benefits also known as 'assistance benefits', come with added words such as death and disability benefits - which are very confusing! Often leaving you wondering what the conditions attached to such benefits are, and how much extra is it costing you.

 

Just make sure that your core product requirement of funeral cover is the bulk of your 'cost' and that cover levels are adequate.

 

Ask yourself will you get enough paid out to you to cover the funeral with some leeway for unforeseen expenses − that will be a good guide.

 

Product enticements

Product enticements such as 'cash back bonuses' or assistance with legal expenses, are good when comparing value across a range of products, but first make sure you are happy with the other points mentioned above as these are much more important considerations to your funeral cover of choice.

 

These are also called 'Value Added Benefits'.

 

Exclusions

Exclusions are conditions upon which you are not covered. These imposed conditions vary from company to company. Common exclusions would include a two-year suicide exclusion, any pre-existing conditions, self-inflicted injuries, substance abuse, war and riot, amongst others.

 

For full details on your particular policy's imposed exclusions, see your Policy Document under a section called Exclusions.

 

Claims Process

Get an idea of the company's claims process policy. It is common practice for certain forms to be filled out before claims can be assessed. It is important to submit all required claims documents as soon as possible so that you don't hold up the process from your side. Time is critical during this difficult time.

 

Cooling off period

A mandatory 30 day cooling off period should also be afforded to you on the funeral policy. This entitles you to cancel the policy if you are not happy with it for any reason, within 30 days of taking it up.

 

Note that the insurer could deduct administration charges from your paid premium before any refunds are settled.

How Mortgage Insurance Works

How Mortgage Insurance Works

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What is mortgage insurance?

It's a financial guaranty that insures lenders against loss in the event a borrower defaults on a mortgage. If the borrower defaults and the lender takes title to the property, the mortgage insurer (MGIC, for example) reduces or eliminates the loss to the lender. In effect, the mortgage insurer shares the risk of lending the money to the borrower. (Mortgage insurance should not be confused with mortgage life insurance, which provides coverage in the event of a borrower's death, or homeowner's insurance, which protects the homeowner from loss due to damage from fire, flood or other disaster.)

Who is mortgage insurance for?

All home buyers can benefit. It allows them to become homeowners sooner, and it dramatically increases their buying power -- excellent benefits from a buyer's perspective. First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

What does mortgage insurance do for borrowers?

Without the guaranty of mortgage insurance, lenders normally require a borrower to make a down payment of at least 20% of a home's purchase price, which can mean years of saving for some borrowers. This large down payment assures the lender that the borrower is committed to the investment and will try to meet the obligation of monthly mortgage payments to protect his investment. With the guaranty of mortgage insurance, lenders are willing to accept as little as 5% or 10% down from borrowers. Mortgage insurance fills the gap between the standard requirement of 20% down and an amount the borrower can more easily afford to put down on a purchase. A low down payment also allows borrowers to purchase more home than they might otherwise be able to afford. Without mortgage insurance, a borrower who has saved $10,000 for the required minimum 20% down payment would only be able to purchase a $50,000 home.With mortgage insurance (and income and credit permitting), the borrower could make a down payment of only 10% and purchase a $100,000 home with the $10,000! Or put $7,500 down on a $75,000 home and use the remaining $2,500 for decorating, investing, or buying a car or major appliance. Mortgage insurance broadens a borrower's options.

Who pays for mortgage insurance?

Generally borrowers do. An initial premium is collected at closing and, depending on the premium plan chosen, a monthly amount may be included in the house payment made to the lender, who remits payment to the mortgage insurer. MGIC offers flexible premium plans for borrowers:

30 Yr. Fixed - Refinance Rates from Our Lenders in California

• Annuals.The borrower pays the first-year premium at closing; an annual renewal premium is collected monthly as part of the total monthly house payment.


• Monthly Premiums. The cost is slightly more than traditional mortgage insurance plans but monthly premiums dramatically reduce mortgage insurance closing costs. Borrowers pay for mortgage insurance monthly as part of their total monthly house payment but only need to pay one month's mortgage insurance premium at closing, rather than one year's.


• Singles. The borrower pays a one-time single premium (instead of an initial premium and renewal premiums). Since single premiums are typically financed as part of the mortgage loan amount, no out-of-pocket cash is used for mortgage insurance at closing.

These plans offer the choice of refundable or nonrefundable premiums. A refundable premium allows the borrower the opportunity to receive money back on any unused portion, in the event that mortgage insurance coverage is discontinued before the loan is paid in full. The cost for a nonrefundable premium is slightly less than that of a refundable premium, thereby giving the borrower a small savings. If coverage is discontinued on a loan with a nonrefundable premium, the borrower has no opportunity for a refund.

Mortgage Insurance

DEFINITION of 'Mortgage Insurance'

An insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage. Mortgage insurance can refer to private mortgage insurance (PMI), mortgage life insurance, or mortgage title insurance. What these have in common is an obligation to make the lender or property holder whole in the event of specific cases of loss.

Private mortgage insurance may be called "lender's mortgage insurance" (LMI) if the premium on a PMI policy is paid by the lender and not the borrower. This is typically done in exchange for a higher rate or fee structure on the mortgage itself.

BREAKING DOWN 'Mortgage Insurance'

Mortgage insurance may come with a typical pay-as-you-go" premium payment, or may be capitalized into a lump sum payment at the time the mortgage is originated. For homeowners who are required to have PMI because of the 80% loan-to-value ratio rule, they can request that the insurance policy be canceled once 20% of the principal balance has been paid off.

Mortgage life insurance can be either declining-term (the payout drops as the mortgage balance drops) or level in its payout, although the latter costs more.

Reasons To Avoid Private Mortgage Insurance

Reasons To Avoid Private Mortgage Insurance

If you're thinking of buying a home, remember you're going to need to save up enough money for a 20% down payment. If you can't, it's a safe bet that your lender will force you to secure private mortgage insurance (PMI) prior to signing off on the loan. The purpose of the insurance is to protect the mortgage company if you default on the note.

Private mortgage insurance sounds like a great way to buy a house without having to save up the cash for a down payment. Sometimes it is the only, or even the best, option for new homebuyers. However, there are several reasons would-be homeowners should try to avoid paying this insurance. In this article, we'll examine the six common problems with PMI and then explore a possible solution that allows homebuyers to avoid it altogether.

Six Good Reasons to Avoid PMI

1. Cost - Private mortgage insurance typically costs between 0.5% to 1% of the entire loan amount on an annual basis. On a $100,000 loan this means the homeowner could be paying as much as $1,000 a year, or $83.33 per month - assuming a 1% PMI fee. (Calculated as: $100,000 x 1% = $1,000 / 12 = $83.33) By itself that's a pretty hefty sum. However, the average home price, according to the National Association of Realtors is about $230,000, which means families could be spending nearly $200 a month on the insurance. That's as much as a car payment!


2. May Not Be Deductible - Private mortgage insurance contracts are tax deductible - that is, if the married taxpayer earns less than $110,000 per year (in adjusted gross income). For married couples filing separately, that threshold is $55,000. This means many dual-income families with a combined income just above the threshold will be left out in the cold. While there are rumors this "income cap" could be raised in the future, there is no guarantee it will happen. Many homeowners (particularly those just above the threshold) may be better off making a larger down payment where at least they'll have the peace of mind that the interest on the loan is be deductible. For more on this important deduction, read The Mortgage Interest Tax Deduction.


3. Your Heirs Get Nothing - Most homeowners hear the word "insurance" and assume that their spouse or their kids will receive some sort of monetary compensation if they die. This is simply not true. The lending institution is the sole beneficiary of any such policy, and the proceeds are paid directly to lender (not indirectly to the heirs first). If you want to protect your heirs and provide them with money for living expenses upon your death, you'll need to obtain a separate insurance policy. Don't be fooled into thinking PMI will help anyone but your mortgage lender.


4. Giving Money Away - Homebuyers who put down less than 20% of the sale price will have to pay mortgage insurance until the total equity of the home reaches 20%. This could take years, and it amounts to a lot of money the homeowner is literally giving away. To put the cost into better perspective, if a couple who own a $250,000 home were to instead take the $208 per month they were spending on PMI and invest it in a mutual fund that earned an 8% annual compounded rate of return, that money would grow to $37,707 (assuming no taxes were taken out) within 10 years.


5. Hard To Cancel - As mentioned above, usually when a homeowner's equity tops 20%, he or she no longer has to pay PMI. However, eliminating the monthly burden isn't as easy as just not sending in the payment. Many lenders require the homeowner to draft a letter requesting that the PMI be canceled, as well as receive a formal appraisal of the home prior to its cancellation. All in all, this could take several months depending upon the lender.


6. Payment Goes On and On - One final issue that deserves mentioning is that some lenders require the homeowner to maintain a PMI contract for a designated period of time. So, even if the homeowner has met the 20% threshold, he or she may still be obligated to keep paying for the mortgage insurance. Check with your lender and read the fine print of a PMI contract for more specifics.

It's Not All BadFor many Americans PMI is deductible.Those families who itemize their deductions and earn less than $110,000 per year, will find that their PMI is deductible. For a couple with a $250,000 loan and a $2,500 annual PMI payment (1% of the outstanding loan), this deduction could translate into savings of $300 to $400 dollars or more (depending upon the couple's tax bracket).

Also private mortgage insurance often can be paid up front. For those people that don't want to work the cost of PMI into their monthly budgets, some lenders will allow for the payment to be made up front, in cash, at the time of mortgage origination. In some cases the lender will even offer the homeowner a discount for paying up front. Another option that many lenders offer is to add the one-time upfront fee to the outstanding loan balance. The advantage to this is that, amortized over a period of 25 or 30 years, the monthly cost is fairly low.

A final "benefit" of PMI is that once you have finished paying off your insurance policy, the mortgage itself may seem easier to pay down. Of course, this is more of a psychological benefit than a financial one, but it can be a nice feeling to suddenly have a couple of hundred extra dollars coming in each month. Savvy homeowners would be wise to reinvest the money they are accustomed to budgeting for PMI, or apply the funds toward the principal balance on the loan. Remember the compounding mutual fund example from earlier.

How to Avoid PMIIn some circumstances PMI can be avoided by using something called a piggy-back mortgage. It works like this: Assume that a prospective homeowner wants to purchase a house for $200,000, but he or she only has enough money saved for a 10% down payment (not enough to avoid PMI). By entering into what is known as an "80/10/10" agreement, the individual will take out a loan totaling 80% of the total value of the property, or $160,000. A second loan, referred to as a piggyback, will also be taken out totaling $20,000 (or 10% of the value). Finally, as part of the transaction, the buyer puts down the final 10%, or $20,000.

By splitting up the loans, the homeowner may be able to deduct the interest on both loans, and avoid PMI altogether. Of course, there is a catch. Very often the terms of the piggyback loan are risky. Many are adjustable-rate loans, may contain balloon provisions, and are due in 15 or 20 years (as opposed to more conventional loans which are due in 30 years).

Incidentally, many lenders also offer a similar loan arrangement for buyers only able to put down 5% toward a down payment. It's called an "80/15/5" arrangement. It works exactly the same way.

The Bottom LinePrivate mortgage insurance is expensive. Unless you think you'll be able to attain 20% equity in the home within a couple of years, it probably makes sense to either make a larger down payment, or consider a piggyback loan. While often more risky than a conventional mortgage, piggyback loans are deductible, and are a terrific alternative for those unable to afford a larger down payment.