Financial Future

So, you’re buying your first home, upgrading to a new house, or refinancing with a new bank/lender. Out comes the paperwork, and they show you life insurance (and maybe a disability or critical illness policy) as part of the monthly payments. It has been included in the price of your mortgage/monthly payments, and you have to sign to decline your coverage and NOT be insured.

Is this type of life insurance protection best for you? When evaluating all your life insurance options, does a mortgage life insurance plan offer you real value? The simple answer is NO! There are many reasons why this type of life insurance coverage is one of the most dangerous forms of life insurance protection you can buy – and is just a huge profit maker for the banks or mortgage lenders.

You pay the premiums but the bank/lender is protected, NOT YOU

Mortgage insurance does offer some life insurance and maybe health insurance protection, but who is it protecting? If you think you are the one being protected you are very wrong.

The bank/financial institution lends you money to purchase your home. If you die, are injured or sick and can’t make payments, the lender risks having to foreclose on a house. The mortgage life insurance policy is designed to protect them if you can’t pay. The bank/financial institution is then free and clear of the creditor, but your beneficiaries have no cash in hand. With every-day costs of living like taxes due, heat, water and electricity bills piling up, how does owning the property outright help with daily living expenses today? Your family might have to sell the home to meet lifestyle needs; likely not what you had intended.

Rising premiums and no portability/convertibility

If you are young you might find the monthly or bi-weekly premium for your mortgage insurance rather low. As you enter your late 40s or 50s this is no longer the case. Mortgage life insurance premiums become very steep as we get older, and are often two or three times more costly than personal life insurance. The banks have priced their product well for young homebuyers, but the chances of young people dying are much lower than when they are older. Combine this with rising premiums; most banks structure their mortgage life insurance to rise every five years as you age, so the low price you are paying today might increase sharply as you age.

What are portability and convertibility?

Portability is having a policy that can travel with you, from home to home and bank to bank. Mortgage insurance is not portable ; it is only available on the home you are buying/refinancing now and only with the financial institution that is doing the lending. If you move homes or move financial institutions, the group mortgage insurance does not go with you. You would have to reapply with another bank at higher rates because you are now older. What if your health has changed for the worse and you can’t qualify for life insurance protection any longer? By moving banks or homes you would lose your insurance coverage altogether!

Convertibility means that your Term life insurance policy (mortgage life insurance is Group Term insurance) can be switched into a Permanent life insurance plan later on if you so choose. This gives you planning options that a mortgage insurance product never will.

Declining coverage – fixed/increasing premiums

Think about this; every time you make a mortgage payment you owe less on your principle. This is great news, as you are paying down the debt you owe the bank. The bad news is that your group mortgage insurance coverage has also just gone down. The smaller your mortgage balance, the less life insurance protection you have – but your premiums have not gone down. They have remained constant during those years, and in some cases have gone up as you have gotten older. This is truly unfair! Why pay a premium for a plan that gives you less and less coverage? Shouldn’t the premium also go down?

For example, if you owed $400,000 when you first bought the house and your group mortgage insurance premium was $150 per month that seemed like a decent price for coverage on a couple in their early 30s. Fast forward 20 years. Assume you have stayed with the same bank all those years and your insurance premiums have remained the same – you are still paying $150 per month but for only $40,000 of outstanding mortgage debt. In comparison, the cost for $50,000 of life insurance today (for a couple aged 55, non-smokers) is as low as $40 per month. You are paying almost triple the going rate for life insurance coverage!

Underwriting at time of death – possible decline of your claim

Another major flaw in mortgage creditor insurance is that you are only underwritten when a claim is filed. This means you are qualified for life insurance protection only when you die. Your original application had three or four broad questions to rule out candidates with insurable, serious health conditions. Often these questions are asked by the lender, not a licensed insurance professional. When you die, the insurance company offering the mortgage insurance will look back to see if you had any pre-existing health conditions. If you had something serious, like diabetes, heart disease, cystic fibrosis, etc, they could deny the claim and return the premiums. Even less serious things, like elevated cholesterol and high blood pressure could cause a denied claim if you died because of complications from these conditions. You may think you are fully insured with mortgage creditor insurance, but the truth is you may not be – only when you die is your policy approved (claim paid out) or denied.

Your best alternative – personal life insurance

When considering where to buy your life insurance protection you should speak to a licensed and professional insurance advisor, like our team at Life Guard Insurance. We can evaluate your debt risks, and all other personal risks you might have. We can design a short term life insurance plan for you, with fixed premiums for a 10, 20 or 30 year term. Or you could look at a permanent cash value policy that will act as a savings/investment product while providing you life insurance protection. You should consider all your options, and get a policy that pays your family, not the bank, if you die. Get a plan that has level coverage for a level cost. Have a plan that is fully underwritten at time of application, so you know you are properly protected.

To review your current mortgage life insurance policy, or review any insurance planning, please contact us at Life Guard Insurance.

(403) 209-3800 ext. 224 OR (403) 680-7730 in Calgary, Alberta, Canada.
www.lifeguardinsurance.ca