So you’ve decided to buy your first home. You don’t have enough to pay for the entire cost of the home, but no matter, because your bank will lend you the rest. You’re excited, and you’re about to sign the mortgage papers. Then the bank asks if you want creditor mortgage life insurance. You, not having any individual life insurance, think it’s a good idea to have the mortgage paid off if you pass away and within minutes, you’re approved for it. You walk out the door, satisfied with the decision you made. It sounds like a great deal, but do you really know what you bought?
Most people don’t realize that these policies sold by a bank are not from licensed insurance agents and brokers, and have completely different characteristics than individual life insurance policies. What are these differences and how do they affect you? Here are ten reasons why you should avoid mortgage life insurance.
- The beneficiary is always the lender. This means you have no choice on what to do with the proceeds from the death benefit, which will always be used to pay off the mortgage. You don’t have the flexibility of using the death benefit for other purposes, such as an investment or to pay final expenses.
- The policy is not portable. If you decide to move your mortgage to another financial institution due to better mortgage rates, your coverage ends and you’ll have to qualify again with the new lender. If you don’t qualify due to a medical condition, you’re left stranded by your lender.
- The policy is owned by the lender. They can decide to cancel the policy at any time with 30 days notice, leaving you without any protection.
- The coverage decreases as the mortgage balance is paid off. Even though you’re paying the same premium, you actually receive less for your money as time goes on. Why pay a fixed amount for reducing coverage?
- Underwriting occurs after a claim is made. Instead of underwriting and determining your risk up front like for an individual policy, with mortgage life insurance underwriting is done post-claim. That means after the insured dies, then there is a test to determine if the insured qualifies for insurance. The insurance company will look through your application to see if there’s anything in there that contradicts your medical history. If they do find something, they have the right to deny the claim.
- The application is not completed by a licensed insurance agent. It’s like having surgery performed by someone other than a surgeon. Only a qualified insurance agent knows the questions asked on the application form and can explain it properly. Having an under qualified bank representative ask you the questions increases the likelihood that the insurance company will find a fault on your application when they do the underwriting post-claim.
- The mortgage insurance expires when your mortgage is paid off. While you may want the coverage to continue after the mortgage is paid off, you don’t have the option of keeping mortgage life insurance like you do for an individual term or permanent policy.
- The rates are not guaranteed. The lender may raise the rates at any time, unlike the contractually guaranteed premiums of individual life insurance policies.
- You can only qualify for standard rates. If you are in better health than the average person, you will be able to qualify for preferred rates for individual term policies, which may be up to 30% cheaper than standard rates. Preferred rates don’t exist for mortgage life insurance.
- Mortgage life insurance are rigid products. You don’t have the ability for conversion, nor can you add riders (options) such as coverage for your spouse or the choice of adding more coverage at a later date. These riders are available on individual products to tailor the policy specifically for you.
Honestly, you don’t need ten reasons to avoid mortgage life insurance. Personally, one or two reasons are enough to turn me away from the product. But when all the signs point to individual products being better than mortgage life insurance, there is no reason anybody should walk out of the bank owning one of these policies. If you’re not convinced, have a look at this video.