Mortgage Insurance from the Bank is inferior Life Insurance. The Bank Owns and Controls Your Life Insurance!
When you are investing in your first home or upgrading to a new home in Grande Prairie, you most likely need a mortgage. The bank loans officer signing the mortgage documents with you will suggest to you their mortgage life insurance protection. The question many Albertans ask themselves is, “Is this a good life insurance protection?”
If you approved the bank’s mortgage insurance, you either haven’t considered the different types of life insurance or you have been too eager to get your own protection and cancel the bank’s plan. If you are not aware of the limitations of bank’s mortgage insurance, this article will reveal all to you. If you do know, consider this a wake-up call to get your own life insurance policy and cancel the bank’s substandard plan.
You pay the premiums to protect the bank with mortgage insurance
Think about this – the bank owns the policy, is the beneficiary of the policy and it is their risk that is protected (they loaned you money so it would be their loss if the loan went unpaid) – yet they have persuaded YOU to pay the premiums for them. How easy it is for them!
Most businesses would try and insure themselves against loss when a business transaction creates financial risk for the business. Not that much with Canadian banks. They put together a brilliant marketing campaign and sold group life insurance, third party, to their clients taking out mortgages with them. The brilliant piece of marketing says that you – the home owner – is protected from loss the moment you die and can’t pay the mortgage. At least the house will be free and clear of debt for your surviving family and no more payments need be made.
Sounds good, but how will you pay your property taxes with a piece of paper saying your home is paid off? How do you shop for groceries when there is no money in your account. This could possibly be the situation if you died and left your family with a paid off house with no liquid cash to handle day-to-day finances. When someone dies, cash is king, as the survivors need money to pay the bills.
The premiums are even but the benefit falls
With mortgage insurance from the bank you pay a level insurance premium for the time it takes to pay off your mortgage, but the amount of insurance you have drops. Each time you make a mortgage payment you lessen the principle owing on the mortgage. Good news! But this also implies you lessen your life insurance coverage since the bank’s mortgage insurance will only pay off the outstanding balance of the mortgage – not the original amount you borrowed and were charged premiums for.
At least if the premiums lessened as your mortgage lessened this would be somewhat fair – but that’s not how it works. As years go by and you have a small mortgage, and thus a small amount of life insurance, the bank is making an total wiping out on your mortgage insurance premiums, as they are almost 100% profit.
Mortgage Insurance is NOT convertible or portable
Convertible means that you can replace the term life insurance (mortgage insurance is just group term life insurance) into a personally owned permanent life insurance policy, like universal life or whole life insurance. This option, which is standard for all personally owned term life insurance policies, is not an option with the bank’s mortgage insurance.
Portable means you can take the insurance with you through life, like from house to house when you move. This is not a feature of the bank’s mortgage insurance either. Bear in mind, the bank owns the policy – not you. They have control over it and they don’t let you to take the life insurance coverage with you. You must remain a customer of that bank to keep your mortgage insurance, even if that bank has uncompetitive mortgage rates when it is due to renew.
Even if you buy a new house, and stay with the same bank, you will have to re-qualify for your mortgage insurance (and there is a possibility you will be refused if your health has worsened). This is because the mortgage insurance you bought is attached to that one house – just like your mortgage is. When you purchase a new home you have to pay out the one mortgage contract and start a new one – so you have to start a new mortgage insurance plan. And since by this time, you’re already older, the premiums for mortgage insurance just went up.
Blended rate premiums for mortgage insurance
The bank’s mortgage insurance does not offer lower premiums for non-smokers and higher premiums for people who chose to smoke. It just has one premium for everyone. It can be a better deal for smokers, who would pay very much less for their life insurance through bank’s mortgage insurance, but with about 80% of Canadians being non-smokers, the great majority of people are over-paying for their mortgage life insurance.
If you are a non-smoker, and especially if you are in good health – you could save from 20 – 40% of the cost of bank’s mortgage insurance if you owned a personal life insurance policy.
Post claim underwriting on mortgage insurance
I have left the most unsafe and insidious feature of mortgage insurance to last. When applying for coverage the loans officer in the bank is NOT a licensed life insurance broker. They are allowed to sell this one product (creditor insurance offered on all loans) and only need to undertake about 3 broad questions. The banks make good profit on selling mortgage insurance so they really convince their lenders to make the sale. So, you can imagine that the importance of the medical questions is not taken seriously.
But, if you set the questions carefully, there is probably something there that might trip you up. Even seeing a doctor in Mexico to have your stomach infection checked could refuse your claim. Post claim underwriting looks at your prior health history up to the date you signed for the mortgage insurance and compares your health records to the answers to the broad, all encompassing questions. If there would have been a YES answer to any of these questions, your claim is denied! All the bank is liable for is to return to you the premiums you paid for the insurance – and the mortgage is still owing.
This is not the case in Canada – with Canadians being denied their mortgage insurance payout for insignificant/minor health issues in their past that they have usually forgotten about.
With personal life insurance there is always upfront underwriting, which means it is the responsibility of the insurance company to investigate your medical history before offering you a policy. The life insurance broker who takes the application is required ask a series of medical questions and is licensed and trained to document your answers and investigate further into the causes and dates of any medical occurrence. You know, when you are offered life insurance from a life insurance company that your death benefit is secure and will be paid out if and when a claim is made.
Life Guard Insurance can get you more effective life insurance vs. the bank
If you would like to get rid of the bank’s mortgage insurance or would just like a review of your plan, go ahead and call us. We will find you a qualified broker in Grande Prairie that can reveal to you the benefits of personal life insurance vs. the bank’s mortgage insurance.