Divorce, Separation, and/or
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You are separated. You are divorced. Someone died. Who owns what? How will things be divided? What about the insurance policies? What insurance? Why, mortgage cancellation insurance, of course.
If you are thinking of separating from your spouse, one thing to consider – although it might be the last thing on your mind, is:
Is your mortgage coming up for renewal any time soon?
Make a plan: If so, you might want to delay your separation until following the renewal of your mortgage if you (either one of you) intends to keep the house, or stay in the house. If the house is in both names, the mortgage company will require the mortgage renewal to have both signatures if the original mortgage is being renewed, if both signatures were on the bank’s original documents. It’s no time to be arguing and talking about separation and divorce, unless you planned to sell the house now, anyhow.
If your spouse refuses to sign, you will be forced to look to making new finance arrangements in order to keep your house. Do you qualify to carry the mortgage on your own? Or any mortgage? If you don’t, you will have a different kind of problem on your hands that might force you to sell the matrimonial home, rather than doing a buy-out of your spouse’s portion of the equity, if that was your intent.
When you buy a house and give a mortgage to the lender (yes, you give the mortgage to the lender and in return the lender gives you the money), the bank may suggest that you should have life insurance on the loan amount. They often refer to this as “mortgage cancellation insurance.” This is very expensive insurance for which you pay insurance premiums on the initial principal balance until the loan is discharged and registered, even though the principal amount diminishes every year; the premiums typically do not.
Regular term insurance can be purchased with a principal amount matching the amount of your mortgage, for much less premium costs. Check with your insurance company, before buying insurance at the bank or mortgage company. Either way, be sure you are both (or all) covered; if people other than spouses are on title to your property, investigate the costs of insuring them, too. You may want to opt to pay these costs yourself to be sure the insurance is always active. The option to have all people on title insured is often available. It wasn’t always this way. You may want to update your files in this regard. In the event that there was a known pre-existing health condition that was not divulged and that medical records will attest to, the insurance company does not have to pay up, but typically may reimburse you for premiums paid to date. In this situation, that is all the insurance company will do.
Here is a true story. The names have been changed for privacy reasons. David and Marion Jones had two small boys. They had been married five years. The oldest boy was four and the younger one, two years old. David and Marion decided to buy a new home. They went to the bank, arranged for financing, worked with their favorite REALTOR® and decided which house would be theirs. So they moved into their new address and set up housekeeping. The bank had required both signatures on the mortgage, and being young the couple agreed with the mortgage manager, to buy insurance to cover the mortgage – mortgage cancellation insurance. They were both feeling “protected,” and were glad the mortgage manager had brought up the subject, because they never would have thought about it on their own.
They lived in their new home for less than a year. Marion did all the banking, and no longer worked outside the home, although she had worked full time when they qualified for the mortgage and now occasionally did some teaching part-time, which helped buy extra things they needed at their new home, with two growing boys. They had taken a five-year term mortgage, for which only less than a year had passed. They were relieved they wouldn’t have to think about mortgages for the next five years. They were getting by just fine now.
One day in spring, Marion went to the bank to do her regular banking. Soon after David received a call at his office. Marion had dropped dead at the bank. She had suffered a massive heart attack. David grieved for his young wife and the mother of his sons. One day not long after her death, David remembered that at least the house was paid for, because they had mortgage cancellation insurance. Although it would be a struggle bringing up two young children on his own, David was somewhat relieved as he recalled the day he and his wife had signed on the dotted line at the bank and was glad that the mortgage manager had suggested insurance.
So off David went to the bank, with a copy of his wife’s death certificate. He’d made the appropriate appointment with the bank manager, but didn’t say what he wanted to talk about. He announced, sadly, that he was there to make arrangements to cancel the mortgage using the life insurance policy proceeds, and thought he should get on with doing the paperwork. There had been so much paperwork to do. The manager offered his condolences.Now David was in for another shock. No insurance. “What do you mean no insurance?” David asked the bank manager. “I have a copy of my mortgage and it says we bought insurance. I specifically recall being asked to take out insurance and my wife and I both signed for it, naturally thinking we’d never need it. I’ll have to go home and pull out the documents.”
”No need,” said the bank manager, “I have the file right here at the branch. Just give me a minute to call it up on the computer. I do recall that you bought insurance.”
“Aha! Here is the file. Yes, I am correct… there is insurance. But the insurance is only on YOU.” There was no mortgage cancellation policy on your wife.
You can imagine the rest of this story. Now, how are you going to protect yourself in the event of such a tragedy?
You may also want to read, “Was It a Gift or a Loan?” Click here.
Getting Divorced? - a list of a 50 questions you need to consider
(and - Should you Sell the house? or Buy out your Spouse?)
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