by Meiz Majdoub
Buying a home can be a stressful experience. It all gets quite overwhelming, especially if it’s your first time. One needs to be mindful that buying mortgage insurance from a bank ties you to that bank with the mortgage. You will be better off to seek out the best term product with the term that you want and there’s a very good chance that it’ll be cheaper.
Insurance Premiums
With mortgage insurance, everyone pays the same premium. There are no discounts for being a non-smoker or being healthy, which means you’re not getting the best price.
Underwriting
This means that your insurance is “underwritten” upfront to determine if you qualify. Assuming you do, your cost of insurance is based on your age, health, lifestyle and pre-existing conditions, but as long as you qualify and pay your premiums, your coverage is guaranteed and the policy will pay out if there’s a claim. The bank’s mortgage insurance uses “post-claim underwriting.” This means that they’ll only decide if you qualify after a claim is made, at which point they may decide you never did qualify and end up paying nothing. This seems terrible, but it does and has happened, be cautious of this.
Declining Benefit
The bank’s mortgage life insurance benefit value declines as you pay down your mortgage just like your amortization schedule for your mortgage. So, while you continue to pay the same price for insurance, it’s actually worth less. Traditional term policies keep their value and usually do so with lower premiums, over the guaranteed period. If you chose a 5, 10, 25 year term or a term to age 65 or 75, the premium and coverage remain the same. The renewal premiums are also guaranteed. If at renewal you do not wish to renew at the guaranteed rate, you can provide medical and get a lower premium. If however, health conditions have changed, you get to keep the guaranteed premium. The options are all available to you especially if one is healthy.
Beneficiary
With mortgage life insurance, the beneficiary is the bank, with personal life insurance, you get to name your beneficiary. Your beneficiary will have the flexibility to choose how to spend the money. They may not need it all to pay off the mortgage. However, though, this means better financial security for your loved ones.
Portability
Mortgage life insurance is tied to your mortgage. If you buy another home or chose a different mortgage lender at renewal, you’ll have to take it out again. A simple term-life policy will be portable and continue to cover you regardless of who you have your mortgage with.
Needs Analysis
If you already have life insurance, you may actually already have sufficient (or partial) coverage for your mortgage. Only a proper needs analysis by an insurance advisor will determine that. Your mortgage lender will not bother with this and will always cover the full mortgage amount.
Consolidation of Coverage
When you get a personal term life, you can consolidate all your insurance needs (mortgage, income replacement at death, funeral expenses, charitable donations,etc.) into a single policy. This saves you money and fees of having multiple plans. The bank, covers the mortgage and must hold different insurance policies for the rest of your needs.
Make sure to consider disability and critical illness insurance, in case you become unable to pay your mortgage due to serious illness or injury, these topics will be discussed in future articles. To ensure if you have sufficient coverage, it is highly recommended to seek a good insurance advisor who will help you determine your needs.
Hopefully this brief overview has provided sufficient understanding in guiding your decision to acquire traditional life insurance for your mortgage needs and not bank mortgage insurance.
The Majdoub Group is very experienced in this area and welcome questions, enquiries and comments. We are here for you.
About the writer
Meiz Majdoub, B.Comm, is a financial professional with over 30 years of experience and is accredited with a CLU, CH.F.C. He is also a member of the Conference for Advance Underwriters (CALU). and the Estate Planning Council Of Ottawa. He has helped individuals, organizations and corporations attain their goals in the areas of Financial & Estate Planning, Insurance, Living Benefits and Employee/ Group Benefits. He can be reached at: 613-749-4007, or [email protected].