You’ve found your perfect dream home, and shopped around for the best mortgage rate (high five). So - you’re sitting down at the bank with your mortgage specialist and they offer you Mortgage Life Insurance. You want to protect your mortgage, because who wouldn’t want to protect the biggest money decision they’ve made? By answering a few “simple” questions, and by filling out one more document you can get the protection you need. How easy! How convenient! Take our word....don’t do it.
The banks try and sell you Mortgage Life Insurance just like BestBuy tries to sell you extended warranties - with the sole intention of boosting their profits. Not to say that protecting your mortgage is a bad thing. It’s actually a wise move...BUT chances are the Mortgage Life Insurance your bank is offering will not only be overpriced, but can end up burning you in the end.
Here are four reasons why you should never EVER get Mortgage Life Insurance from your bank....
Reason #1: You are ONLY Approved Once You MAKE a Claim
When it comes to Mortgage Insurance banks use something called post claim underwriting. What this means is, you are only approved AFTER you make a claim - NOT before. So what’s the big deal?
If let’s say the worst happens and your family needs to make a claim, you could be denied for coverage even though you’ve been paying your premiums the whole time. PLUS if you answered any of the questions on your form incorrectly, that’s enough to reject your claim all together.
Of course you will be reimbursed for the premiums you paid out...but what about your coverage? If you’re paying for protection, we think that a product should do just that.
(The CBC did an awesome expose on this a few years back. Check it out!)
Reason #2: The Longer you Pay...the LESS You are Covered for
Think about how you pay down your mortgage - each payment means you end up owing less and less. With Mortgage Life Insurance since you are covered for the mortgage balance this means that the total amount you’re covered for in Year One, is significantly more than how much you’ll be covered for in Year Five.
Your coverage actually decreases over time BUT - your premiums don’t decrease. In other words you’re paying the same amount...for less coverage. Does this seem fair to you?
Reason #3: You Aren’t Covered Forever
Did you know that your coverage only lasts as long as your mortgage term? That means that every time you renegotiate your mortgage, you’ll need to also renegotiate your Mortgage Life Insurance. So - it might seem super convenient NOW but be aware that you’ll need to deal with it again later (and again..and again...and again).
Reason #4: The Bank Gets Your Money $$$
Compared to other forms of life insurance, with Mortgage Life Insurance the lender is the beneficiary who gets your payout. With other forms of life insurance, the money goes to the beneficiary of your choosing so that they can spend the money as they see fit...instead of lining the banks’ pockets.
So...What’s the Alternative?
I’ve got three words for you: Term Life Insurance. With Term Life Insurance you’re approved before you make a claim, your coverage doesn’t decrease over time, and the money goes straight to your family.
Got questions? We recommend speaking to an Insurance Expert to find out what best suits your needs. Request a Call from an Insurance Expert >
That’s it for this week! I hope you learned about how to protect your mortgage. Tune in next week when I share how to pay off your mortgage faster (exciting stuff - eh?).
Kelvin Mangaroo
Founder, RateSupermarket.ca
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I found this out many years ago. My ex was in an accident and completely unable to work for 6 months. We had disablity insurance as well as life insurance and they only covered a tiny amount ($60) It was a complete joke. The paperwork required to obtain that $60 was rediculous.
When I got my own mortgage I declined the life insurance as I have term insurance with my employer. My coverage will last as long as I am contributing, so likely til age 65 (way longer than my mortgage will last) and my family gets higher payout for less cost to me.
Good post, people need to know this!
October 03, 2011 @ 11:15 amYes, I already knew that avoiding mortgage life insurance was a good idea too B-Kat. However, I did learn several more reasons why it is such a bad idea from this article. I feel bad for those people who do get it and then have to deal with all of the above problems.
October 03, 2011 @ 12:17 pmGreat article. One thing you didn't mention that I often point out to clients is that if you change mortgage companies, you will have to reapply for the mortgage insurance. You may not be healthy at that point and be turned down(and therefore HAVE to keep your mortgage there). This happened at least once where I knew a client who changed from one major bank to another. The mortgage was approved and was transferred ... however, the insurance was declined after the mortgage came over and the client ended up dying after a couple of years and had NO coverage. If they had had term insurance they could have ported their mortgage over and over and would have maintained coverage.
October 03, 2011 @ 11:26 pmThe CBC Marketplace episode about mortgage insurance is worth watching. Just the fact that having a routine blood pressure test at the doctor's office (meaning that you have been tested for high blood pressure) may mean that your claim could be denied if you were not "honest" about your blood pressure on the insurance form.
October 04, 2011 @ 12:34 pm@Arlene - That's another great point that you make. You definitely don't ever want to have to reapply for insurance so having an independent insurer is definitely the way to go!
@Roger - It really bothers me how some insurance companies companies can go after such minute details to deny your claim. Of course, they are in business to make money but insurance is something that has to be there when you need it! I personally have a big distrust for insurance companies even though I've never actually been raked over the coals by one though - hopefully they aren't as bad as I imagine sometimes.
October 04, 2011 @ 2:03 pmIt's important to note that life insurance coverage is pretty straight forward, but not all disability policies are written to cover all disabilities and all work disruptions. (I.e your disability may prevent you from working your current job, but maybe not another job, so important to clarify in your policy, either private or through work). Call the actual insurance company that is providing the coverage to ensure you are filling out forms or answering questions correctly so your claims have minimal chance of being declined. All insurance companies are in business to avoid paying out 100% of their claims or they'd be out of business.
October 04, 2011 @ 4:47 pmMy friend and I didn't know this about mortgage insurance when we took out our mortgage. However, in the long run it has worked out a bit better for us, the friend has become uninsurable so everytime we renew we are actually underwritten at that time. Although the coverage isn't 100% of the mortgage a portion of it will still be paid off if something happens to either of us.
October 06, 2011 @ 4:14 pmI think I fall into the category of the ignorant people who bought mortgage life insurance! I should have done my research before saying yes to the mortgage guy...
Though BF started smoking again and it's cheaper to pay for mortgage insurance right now than term life insurance..
We will definitely do something different when our mortgage is up for renewal.
October 06, 2011 @ 8:50 pm@Susan - Great advice. Calling and clarifying things with your insurance company is very important. This is especially true with disability insurance I would think because it can often times be much more complicated than other types of insurance.
@Jane - Glad to hear a positive story about mortgage insurance. I am not very insurable when it comes to life insurance because I have type 1 diabetes, so I was very fortunate that my dad got a life insurance policy with guaranteed add-ons for when I was in my 20s and early 30s. This has allowed me to get a decent amount of life insurance at the normal rates - thank goodness!
@youngandthrifty - I think you're in good company there. Most people take it because their house is their biggest asset and they want to make sure they are protected. I don't think the majority of people understand the ins and outs of life insurance. I think I learned through MillionDollarJourney years ago before I got my first house to pass on mortgage insurance, so I was lucky.
October 06, 2011 @ 9:24 pmGreat post! I lucked out and my ignorance paid off for the mortgage life insurance 'trap'. My understanding of mortgage life insurance was that it would pay off your mortgage if you die and at the time, my thought was just sell the place and pay off the mortgage if I die, no point in getting mortgage life insurance. I didn't think as much as losing my job...oops.
October 10, 2011 @ 5:59 amThe information you provided on mortgage insurance was excellent; and offers much to consider. Insurance is one of those things that you hope not to need to make a claim.
When we bought our home, my spouse was one of those people who could not qualify for private term/life insurance. The only insurance that we could get at that time was that which was offerred by the bank. So we took it; but still, we never expected to need it.
Unexpectedly, 5 years later... he passed away; and the bank paid out 100% of our remaining mortgage. If we had not had that insurance, then I would still be making monthly payments on the mortgage or possibly been forced to sell the home to pay the mortgage off.
Yes, while the bank got the mortgage payout sum, the house was fully paid for. I don't look at it as the bank lining their pockets since the insurance repaid the remaining borrowed amount, which was significant, and far more than the bank mortgage insurance cost.
I do agree that there are far better ways to insure a mortgage if you qualify. But if you don't, then bank provided mortgage insurance is better than none.
November 07, 2011 @ 2:45 pmExcellent point K! There are always upsides to everything. As they say, beggars can't be choosers but if you have the good fortune to be a chooser then you should choose wisely.
November 07, 2011 @ 2:55 pmI think this post hits home. I would love to start paying down my mortgage with lump sums faster so that 10 years instead of 25 years down the road I can have my mortgage paid off. I am well on my way to doing this and hope that I can do at least one lump sum payment a year on it to hopefully get it down to next to nothing. Biggest challenge in most people's lives is to pay down their mortgage! Good read. Thanks
February 16, 2012 @ 2:28 amPost new comment