Mortgage Insurance Basics
The individual buys a house and takes out a big loan to pay for it. Now, the bank is asking whether they want life insurance. Reluctant to leave an unpaid debt when they die, they say yes. Within minutes, their application is approved and the cost is added to their mortgage payments.
For lenders, life insurance is an easy sell. They suggest it at a time when the customer is most vulnerable and have yet to do any comparison shopping. The customer also sign a waiver form if they decline the insurance, agreeing not to hold the lender responsible if something happens to them.
Most people don’t realize that the life insurance sold by mortgage lenders is different from the policies sold by life insurance agents and brokers. While it sounds like a great deal at the time, this type of mortgage life insurance is great for the bank, as they are fully protected, but is it great for you? Unfortunately, there are some drawbacks with bank group mortgage life insurance.
Introduction to the concept
- A mortgage is the single largest debt most Canadians will ever assume. Most consumers will take the time to shop around for good interest rates and terms that suit their needs, but not everyone bothers to do the same for the accompanying life insurance.
- Many simply accept the coverage that’s offered by their lender without investigating other options. That’s a pity, because in many cases you can obtain better coverage for a lower price from an independent financial advisor.
What is mortgage insurance for?
- Mortgage insurance is about protecting your loved ones. If something should happen to you (or your partner), mortgage insurance will pay off your debt. It’s a simple concept, but the details in each contract can vary significantly.
What kind of coverage does the bank offer?
- If you purchase mortgage insurance from your bank or credit union, you are purchasing creditor’s group insurance.
- You are a certificate holder. You do not own the policy. The bank may make changes to the coverage without your consent, and coverage will terminate as soon as the mortgage is paid off.
- The premium you pay remains the same, but the coverage decreases along with the balance of your mortgage. You are paying a level amount for decreasing coverage.
- You are not able to name your own beneficiary. If something should happen to you, the bank receives the insurance proceeds directly.
- If you decide to change banks at a later date, you will have to reapply for insurance coverage – you will pay rates based on your age at that time, and if your health has changed, you may be declined.
- In most cases, creditors group is based on “blended rates,” meaning that smokers and non-smokers pay the same amount for the same coverage. If you live a healthy lifestyle, you will pay the same amount as someone who is overweight and smokes a pack a day.
- Bank mortgage insurance only covers the first to die, but charges you for two people insured. That means, if you and your spouse are both killed in the same car accident, the bank mortgage policy only pays for one life.
What are the advantages of owning my term insurance policy through an insurance company?
- An individual term insurance policy, obtained directly from an insurer, puts you in control of your own coverage.
- You own the policy. If you decide you want to keep some or all of the insurance after the mortgage is paid off, you may do so.
- Your insurance is for a fixed amount, based on the original amount of your mortgage. If you purchase a policy for $200,000 and you die when your mortgage is only $100,000, your heirs will still receive the full $200,000.
- You may name whomever you please as beneficiary – spouse, child, grandchild or friend. They receive the funds directly from the insurance company, meaning they are free to decide whether they want to pay off the mortgage, or invest the funds and use the interest to make the monthly payments.
- An individually-owned policy is fully portable. When your mortgage renews, you are free to shop around for the best rate. If you decide to change lenders, your individual policy will come with you – completely unchanged from when you first obtained it. You will not have to reapply for coverage, and your premiums will remain unchanged.
- Ask your banker about “Waiver of Premium for Disability”, rights of “Convertibility”, “Guaranteed Insurability Rider” if you move to a new home or change banks. You’ll probably get a look of confusion. Solution: An Insurance Agent has many valuable options that can be included in a policy that you own and control.
- An individual policy is fully underwritten based on your individual circumstances. Someone who leads a healthy lifestyle could end up paying a much lower rate for better coverage. The banks have post-claim underwriting, where the underwriting is completed after a claim is submitted. A customer could be declared uninsurable after they have submitted a claim resulting in years of paid premium, their claim being denied and leaving the mortgage unpaid.
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