So we already know that getting an insurance policy to cover your mortgage is probably a good idea, especially if you have a family and want to make sure they can keep the family home should you unexpectedly pass away. Well what is the best way to do this? Does one simply purchase a mortgage insurance policy from a bank or mortgage broker, or does one purchase a life insurance policy from an actual insurance company? What are the advantages or disadvantages of either choice?
Ellen Roseman recently wrote in The Toronto Star about the experience of the Feldman family, who had been paying premiums for years. They had a mortgage insurance policy from a bank and the claim was denied initially but later paid out on “compassionate grounds” after extensive publicity by the Toronto Star. The Feldman’s were lucky, but many are not so lucky.
Many people are unaware of the disadvantages of bank mortgage insurance products and the benefits of a true life insurance policy from an actual insurance company designed to protect the family and not the bank. In this post I hope to highlight the differences between these two products.
Bank, Credit union or trust company mortgage insurance:
With most banks, credit unions or trust companies, you are covered under a group policy owned by the bank. These policies are not portable, which means that if you transfer your mortgage to another bank, you automatically lose your existing coverage and must go through the application and underwriting process again. Because the bank owns the policy, you have zero control over it. The features and the provisions of the group policy are the same for everyone insured under it. The only variation is in the benefit amount. The benefit amount of a bank mortgage policy can only be for the exact amount of your mortgage outstanding and coverage can be cancelled at any time by the bank, credit union or trust company.
The bank mortgage insurance policy also has what is commonly called a “declining benefit amount.” This means that as you pay down your mortgage, the amount of coverage you are paying for decreases but your premium costs stay the same. If you were paying $40 per month for $300,000 benefit payout in the first year of taking on the mortgage, at year 20 assuming you have paid down the mortgage to the point where you only owe $10,000, you would still be paying $40 per month for only $10,000 worth of coverage.
Mortgage/Life Insurance with an actual insurance company:
Through an actual insurance company you can purchase an individual personal life policy owned by you and because you own the policy you have total control. You choose the beneficiary, unlike bank policies where the beneficiary is the bank. The policy can be designed specifically for your unique needs. You can choose features that work for you and opt out of features that you do not need. Unlike bank policies, the total coverage amount can be higher, or lower than the cost of your mortgage. You may purchase any amount of coverage you require.
A policy underwritten by a true insurer cannot be cancelled unless you the policy owner wishes to cancel the policy. Unlike bank policies that are one size fits all, you can purchase any type of insurance that suits your needs. Coverage stays level, which means the policy value will never be less than the initial coverage purchased (No declining benefit amount). The policy is always portable even if you move your mortgage to a different bank and in many cases convertible to other types of life and health insurance products.
However, the biggest issue with bank mortgage insurance policies is post claim underwriting. This means that they will investigate to see if you were eligible to have the policy in the first place only after a death claim is submitted. As with the Feldman’s, your family could be told that you were uninsurable only after you have paid years and years of premium payments to the bank. When you purchase a mortgage life policy directly from an agent of an actual insurer, all underwriting is done prior to policy issue and you can be sure that your beneficiaries will get the benefit payment, unless of course there was fraud or misrepresentation in the application, but that’s a topic for a different post.
If you are looking to purchase insurance to protect your mortgage, benefit your family and not the bank, reach out to me and I will guide you through the process of determining the appropriate insurance coverage for the ones that matter.