Q. In my will I am leaving my condominium and all of its contents to my son. I have taken out a life insurance policy so that he can use the money to pay the balance on my mortgage. What are the pros and cons of this plan?
A. Hello, Annie. It’s clear that you’ve made your will, but your letter doesn’t mention your age or what other assets or beneficiaries you may have recognized in it. Did you use a lawyer to prepare your will?
A lawyer would work with you to ensure you have a plan for what happens if your son passes away before you or with you—and, if he does, who is your alternative beneficiary? Have you considered whether your son will live in the condo or sell it? And does your son have a spouse or children who may inherit if he does not survive you? If you haven’t already considered these questions with a lawyer with experience preparing wills, I urge you to do so.
You have also asked for my take on the plan to life-insure your mortgage.
If you obtain life insurance from your mortgage lender, it may be only valid while you have the mortgage with that particular lender. If you change mortgage companies, you may lose that insurance coverage and, at that point, you may not qualify for new insurance. To mitigate that risk, you should obtain independent life insurance coverage and not life insurance from the mortgage lender. This independent insurance may also prove to be less expensive.
There are other reasons to opt for independent life insurance. Mortgage insurance may be tied to the amount of your mortgage. So, let’s say your mortgage principal is $200,000 when insurance is first obtained. As the years go by and you continue to pay down your mortgage, the principal amount will decrease so that by the time the benefit is claimed, your mortgage principal could be down to $50,000—and that is what the mortgage insurance will pay out. From a financial perspective, that means you may have deprived your son of $150,000 in tax-free benefits (the difference between an insurance payout of $200,000 and $50,000). If you obtain independent insurance for $200,000 today, the payout down the road will be $200,000, regardless of the amount of principal left of your mortgage.
Normally, life insurance benefits are tax-free. Independent insurance agents can direct insurance proceeds to your son and not to your mortgage company, and this may provide your son with greater benefits if he decides not to live in your condominium.
Now, let’s talk about the property itself.
You did not mention if you had a spouse. If so, your spouse may also have rights to the condominium that must be considered. In addition, you should keep in mind that the correct legal description for real estate gifts is crucial; if your will fails to specify the correct description for the condominium you have in mind, your gift may not be passed along to him.
Ed Olkovich is a Toronto lawyer and certified specialist in Estate and Trusts Law.
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