You're buying a house and taking out a big loan to pay for it. Now, the bank is asking whether you want life insurance. Reluctant to leave an unpaid debt when you die, you say yes. Within minutes, your application is approved and the cost is added to your mortgage payments.
For lenders, life insurance is an easy sell. They suggest it at a time when you're vulnerable and have yet to do any comparison shopping. And they make you sign a waiver form if you say no, agreeing not to hold the lender responsible if something bad happens to you.
If you have a mortgage on your home, chances are good you also have mortgage insurance. The idea is that if you should become seriously ill or die before paying off the mortgage, the coverage will kick in and pay it off for you. It's meant to offer peace of mind and to reassure you that your family will be able to stay in your home if anything should happen to you.
It sounds like a great deal at the time, but mortgage life insurance can be more expensive than insurance sold separately, and there are many instances in which claims can be denied. It turns out a routine test at the doctor could be reason to deny your claim, if you don't mention it. Had a cuff inflated on your bicep? That counts as being tested for high blood pressure. In addition, the bank staffers selling mortgage insurance are generally unlicensed and rarely properly trained to explain the details and legalities of those insurance products. The result is people who pay premiums and think they are covered, often realize later they are not!
Furthermore, 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. Let's take a look at the fundamental differences:
|Credit Mortgage Insurance||Individual Life Insurance|
|Post-Claim Underwriting: Unlike individual life insurance, credit insurance sold through the bank is usually not underwritten until a claim is made. This means the insurance company may determine you are not eligible for a payout even though you have been paying premiums. For instance, a claim may be denied because an investigation of your medical records indicates you once had high blood pressure or high cholesterol that you did not disclose.||Underwriting: When you apply for individual insurance through a licensed insurance broker your medical history will be examined before a policy is issued and you start paying premiums. The insurance broker will ask detailed questions and may arrange for a nurse to conduct a physical. You will know upfront whether or not you are covered.|
|Standard premiums: The mortgage insurance policy sold at the bank is a one size fits all policy. This means everyone who qualifies is considered to be of equal risk. The premiums you pay on mortgage insurance are a fixed amount based on your age and the amount of your mortgage. There is no discount for non-smokers or for women. The premium does not reduce as the mortgage is paid down.||Individual premiums: With an individual life insurance policy, the premiums you pay are based on your individual risk. Your health history and exam will help to determine how high or low your premiums are. Non-smokers and women pay a lower premium. The face amount of the coverage remains level.|
|Decreasing payout: The Mortgage insurance sold at the bank covers a decreasing amount. While your premiums remain the same the amount left on your mortgage decreases. Mortgage insurance will only pay off the balance of your mortgage when you make a claim.||Fixed payout: When you purchase an individual insurance policy you pay premiums for a pre-determined amount of coverage. Therefore, if you pay premiums for $100,000 of coverage your beneficiary will receive $100,000.|
|The bank gets the payout: Mortgage insurance is designed to pay off the bank if anything happens to you. Therefore the insurance payout will be made directly to the bank.||You choose who gets the payout: With an individual policy you are free to choose the beneficiary or beneficiaries. If something happens to you, it is up to your beneficiaries to decide what to do with the insurance|
So before you sign on the dotted line, shop around and evaluate your options. Personally owned insurance offers many advantages over mortgage insurance that must be considered prior to making a commitment.
For more information, refer also to the CBC Marketplace report
The Insurance Advisors @ Guthrie Insurance Brokers Ltd
Toronto – (416) 487-5200 Richmond Hill – (905) 313-8481
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