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You Don’t Buy a Happy Meal for the Toy

I had an awesome question via Twitter from Ben Arledge, a REIN member and web developer.

Thoughts on life/disability insurance on rental property?

To which I replied:

Not worth it, better do deal with a real insurance broker and get the right insurance. You don’t buy a happy meal for the toy.

His next question is the important one.

What’s the “right” insurance? I’m considering no life or disability insurance, just normal home/landlord ins. Yay or nay?

I’m a fan of term life insurance, and you can get the same coverage for less than what the lender is offering you.

There’s a good discussion in the legal section of myREINspace about just why it’s better, but the story (via Rob Lungren) is essentially this:

Not only is mortgage insurance offered by the banks more expensive, it only pays out the balance of the mortgage direct to the lender. So as you pay off the principle the return on your insurance payment actually goes down.

I chose to purchase extra term life insurance (enough to cover paying off balance of mortgages). In the event of my untimely demise my wife (or kids) gets paid out full amount and they can then pay off the mortgages and keep the difference.

For instance, lets say I take out $500,000 mortgage insurance with the lender and I pass away in five years. If $20,000 has been paid down on the mortgages, $480,000 gets paid out to the lender and my family holds title free & clear.

If I purchase term, my family gets paid out the $500,000, they can choose to pay off the remaining $500,000 and keep the remaining $20,000. Or they can also choose to pay off a portion and keep more, but they now control the situation, not the lender. And it’s less expensive!

Now, a properly cash-flowing investment property should be no burden, except for possibly capital gains owing at the time of death due to the transfer, but that’s a question for your accountant.

However, how much life insurance you wish to have beyond that is an important topic you need to discuss with your family. My father in law died suddenly in 2007, and I had a chance to see first hand how important and helpful well bought life insurance can be.

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