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In today’s post, I’ll try and answer two more questions that were sent in to the Personal Finance Clinic. You may also want to check out Triaging My Way to Financial Success and Money Gardener for more questions that were sent in to the clinic.
Tony asks:
We currently have mortgage life insurance, but what I’ve been reading lately leads me to believe that it may not be the smartest decision. Are we better adding the value of our mortgage onto each spouse’s life insurance policy and canceling the mortgage life insurance?
The drawbacks of Mortgage Life Insurance were pointed out in an earlier post (See Mortgage Insurance versus Life Insurance). I think it makes sense to first obtain or increase an adequate amount of term-life insurance and after the policies come through, cancel the mortgage life insurance. A chat with a licensed insurance broker should clarify matters.
Bryce asks:
When buying a dividend stock or even a corporate bond, is it best to wait till a little before the dividend is paid out to buy the stock?
The short answer is no. This article on Investopedia explains terms such as declaration date, ex-dividend date, record date and payment date. Unfortunately, you cannot make more money by purchasing a stock before the ex-dividend date. The stock price will usually drop by roughly the amount of dividend payment on the ex-dividend date.
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8 responses so far ↓
1 Phil S // Jul 20, 2009 at 8:51 am
Regarding buying just before the ex-div date, I would agree that in many cases, the share price will fall by the same amount. But with that said, there are still many stocks which are not so predictable due to many extraneous other factors affecting the stock price. For example, the Big 5 banks can often move by 1.5% in a single day of trading and due to whatever external factors, they may go up immediately after the ex-div date depending upon that day’s news.
2 Ray // Jul 20, 2009 at 9:53 am
Term life insurance is probably a good choice for you, however as CC pointed out do not cancel any insurance until you have obtained a new policy.
3 Sean // Jul 20, 2009 at 10:55 am
The degree with which the banks try and sell you loan insurance (it’s a hard sell) should be a tip off to how bad a deal it can be.
The fact you pay the same amount every month for declining coverage (as the loan gets paid down) is a real killer. Term life insurance is likely a much better option.
4 Cam Birch // Jul 20, 2009 at 12:13 pm
A shorter term option instead of term insurance is YRT insurance. This isn’t really a good option if you are going to hold your mortgage for 25-40 years but if you are the type to rapidly pay it down or are young and somewhat short on money it is a lower cost option.
YRT is Yearly Renewable Term. Basciallly it is a permanent life insurance product that charges you this year based upon your risk/age. It is similar in alot of ways to term insurance but rather than going up every 10 or 20 years it changes each year.
This means that if you were choosing a 10 year product to cover you for only 5 years, you would spend less on a YRT (most likely, though YMMV).
I wouldn’t recommend it for long term people. But if you are just switching and have only 5 to maybe 10 years left on your mortgage it could be a more cost effective method of insuring.
5 Sparky // Jul 20, 2009 at 4:50 pm
An even worse deal at the bank is the insurance they sold me on my Home Equity Line of Credit. After reading the fine print, the amount insured is only the average balance for the past 12 months, so if you need theinsurance 2 months after taking a large amount out, then you only get a small amount back.
6 Canadian Capitalist // Jul 22, 2009 at 11:09 am
@Phil: Yes, it is hard to distinguish the drop due to the dividend payment amidst the normal day-to-day volatility of stocks. However, when a company pays a large special dividend, the stock price trades down roughly by the dividend payment. One example that comes to mind is when Sears Canada paid a large special dividend a few years back.
@Cam: Interesting. I’ve never heard of YRT insurance. Thanks for the info.
@Sparky: Interesting tip. I suppose credit card balance insurance is another rip off as well.
7 Neil // Aug 18, 2009 at 10:48 pm
First off, I think we all agree that a life insurance policy is the way to go. Now for the subject of YRT as being a cheap short term option. 10 year term insurance is as cheap as it gets. Believe it or not, 10 year term is acutally cheaper than most 5 year term policies. The problem with YRT is that it goes up every year and if you need to keep it for 10 years, you will pay much more. The problem is that many poeple often have wonderful intentions of paying their mortgages off quickly. Unfortunately, life will often throw a wrench in those plans (job losses, sickness, investment opportunities) and people end up taking longer to pay off the mortgage. Many people are in a much different (and by different I mean worse) situation finanically than they were 2 years ago. At least with 10 year term, you know exactly what your insurance costs will be each month for up to 10 years.
8 Cam Birch // Aug 19, 2009 at 12:19 am
@Neil, I agree with the principle of your argument. Your facts are somewhat skewed though. The best policy depends largely on what you want out of it, and especially on your current health (and technically the prediction of future health). Some insurers will give you a better deal on 20 year term than 10, others you will find the deal is actually in the permanent products. You must research for yourself to discover the options available for your personal situation.
On a different note if you did not understand this from my previous comment.
The *only* reason to go with YRT is if you have an unknown situation for the short term or you have only a few years left on a mortgage. A comparison of policies for myself showed that a YRT will cost more than a 5 year policy in 3-4 years. It will cost more than a 10 year policy in around 6 years. Very few companies actually offer a 5 year policy so yes in most cases it can actually be more expensive than a 10 year term. I actually did research (in Canada, maybe the US is far different) and found some low cost 5 year and 10 year and compared that to the YRT policy.
The interesting item is the total cost of insurance over the short term (5-10 years) is approximately equivelent between the YRT and the term policies. Why? YRT starts low and builds up, term starts average and stays that way. Long term though YRT is not a good option, though it has never been billed as that and shouldn’t be.
I am in a personal situation where I will be making huge changes to my financial situation over the next 3 years and as such decided I needed coverage for now and will be building a proper insurance plan later. The best price option for myself was a YRT. I would never recommend this option to anyone who has more than 5 years on their mortgage in actual fact, or someone who needs cheap temporary coverage right now.
Long term a YRT plan is a very stupid option. You need to get term or permanent insurance. YRT is a niche product that has a very limited application, incredibly useful when applied properly, very stupid when applied incorrectly. As always if you want to screw around with your money you need to be informed, knowing the available options is the first step to becoming informed, nothing more.
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