Protect Your Mortgage: Mortgage Life Insurance Exposed
One more thing to consider during your mortgage shopping process is Mortgage Insurance, which is different than Mortgage Default Insurance. This is a step often left to the end that should be given more consideration if you want to save money.
WARNING: similar to the extra warranty they try to sell you when you buy a laptop or refrigerator, mortgage life insurance is the ‘add-on’ product that helps to boost the lender’s profits. That’s not to say that insuring your mortgage is a bad thing – it’s actually a smart move, it’s just important to realize that your lender is probably going to offer you an overpriced mortgage insurance product.
Here’s the background information that you need to make sure you don’t get taken for a ride.
What is Mortgage Insurance?
The underlying concept of Mortgage Insurance (also referred to as mortgage life insurance and creditor insurance) is that if you die or become disabled the insurer will pay off the rest of your mortgage.
BUT – it’s not that Simple!
Here’s what’s wrong with Mortgage Insurance.
Coverage Decreases over Time
Mortgage insurance is also known as a decreasing term insurance. Of course it’s not the premiums that are decreasing, it’s the coverage. While your premiums stay the same for the duration of your mortgage, the coverage you’re receiving is actually declining with your mortgage balance.
In other words, as your mortgage decreases over time you receive less coverage, but pay the same – does that sound fair to you?
Coverage is Not Everlasting
Your mortgage insurance will only last as long as the ‘term’ of your mortgage. It does not last as long as the amortization period of your mortgage. What that means is that if you have locked in your mortgage rate, for say 5 years, your mortgage insurance will only last for 5 years. When you have to renegotiate your mortgage, you have to renegotiate your mortgage insurance.
You are only Approved When You Make a Claim
You sign up for mortgage insurance and begin paying your monthly premiums. But did you know that the only time the insurer checks to make sure you qualify for the coverage is after you submit a claim? This means that if an unforeseen incident happens where the main breadwinner in your family passes away, the insurance company can deny your claim because you didn’t qualify in the first place, or if there were any inconsistencies in your application. This is called post-claim underwriting. Your premiums get refunded, but that’s not the point… you’re still left wondering how you’re going to pay your mortgage.
The Lender is the Beneficiary
After you submit a claim, assuming that you’ve been approved, the you lender is the beneficiary and the money goes straight into their pockets.
So…What’s the Alternative?
Another option is to purchase Term Life Insurance. With Term Life Insurance your coverage doesn’t decrease over time, you’re approved beforehand, and the money goes straight to you.
Term Life Insurance: Choosing a Term
The most common types of term life insurance for mortgage protection are 10 year , 20 year, and 30 year term. These products charge constant premiums for that time period (10, 20 or 30 years). So if you have a 30 year mortgage, a 30 year term life insurance product will ensure that you have the coverage for the period of your mortgage. No medical exams in the middle, no re-qualifying, and no increase in premiums.
Life Insurance Bonuses
Individual term life insurance products are not tied to your mortgage. That means that while your premiums will remain level for a period of time, so will your coverage – it doesn’t decline with your mortgage balance.
You can also name your own beneficiary – and it doesn’t need to be the bank. You can name your spouse or your dependents for example.
Plus, most term life insurance policies in Canada have what’s known as a conversion privilege. This allows you to trade in your term life insurance policy for a permanent life insurance policy – without a medical exam. This conversion privilege means you are assured of being able to buy life insurance at healthy rates in the future even if you become uninsurable. These are features simply not found with mortgage insurance.
Other Benefits of Life Insurance
- Discounts are available based on your health and your family history
- Premiums are taxed at a much lower rate
- It’s more flexible – you can change mortgage lenders and take the coverage with you if you move homes or you can convert a term policy into a permanent policy.
- Policy terms don’t change and in most cases the policy premiums are guaranteed
Where can I get Life Insurance?
You can go direct to an insurance company or use an insurance broker. Life insurance brokers are not tied to an individual company and can shop around to find the least expensive rates for your situation. They can also give you advice on the right amount of coverage for you.
What Steps Should I Take?
Most importantly, remember that the lender who’s offering you mortgage insurance isn’t shopping around to find out if it’s the best rate available. They simply offer you whatever insurance product their institution offers, without regard to price or product benefits.
Take the following steps to make sure your mortgage is protected and you’re getting the best rate:
Shop Around
Compare life insurance rates to the mortgage insurance rates offered by your bank.
Top it Up
Consider buying or topping up an individual life insurance policy to cover your mortgage instead of using mortgage insurance.
Speak to an Expert
Speak to a licensed insurance broker, not just your mortgage lender, to get advice on coverage. Speak to an Insurance Specialist >
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