In its basic form, traditional mortgage life insurance is an insurance policy that will pay off a mortgage in the case of the death of the borrower. It should be understood however, that mortgage life insurance is strictly voluntary! Yet most mortgage lenders (primarily banks, trust companies and private mortgage brokers) specify the purchase of such coverage as a “precondition” to obtaining the loan. Whether it’s the sales pressure or the general anxiety of making one of the largest investment decisions of ones lifetime, most consumers opt for the coverage offered by the lender without doing any research. Unfortunately, by taking this route, you could find yourself and your family at a serious disadvantage.
Many lending institutions offer non-convertible “group-style” term insurance with no cash values, no premium flexibility and no ability to move to a permanent life insurance policy if your needs change. This kind of mortgage insurance usually only covers the exact balance of your mortgage, so in essence, your coverage decreases as you pay down your mortgage while your premium remains at its original level! With lender’s mortgage insurance, your lender owns the policy and if you find a better mortgage rate at another lending institution your coverage is typically cancelled, your paid premiums are forfeited and you may have to re-qualify medically for the life insurance protection at the new institution. Furthermore, if you die before your mortgage is paid, your lender pays off the mortgage automatically; there is no opportunity to apply the death benefit to an area that may be required more urgently.
As an alternative to lender insurance, you may want to explore an individual (or joint) life insurance policy purchased through a licenced life insurance professional. A personal life insurance policy purchased doesn’t just insure your mortgage, but rather insures you! After all, you make the mortgage payments. With personal life insurance, you can plan to meet more of your family’s needs in the event of death, including paying off your mortgage and staying in your dream home. With personally-owned life insurance, you select the policy that meets your financial security goals. Most personally-owned term life insurance products contain a right to fully convert to a permanent policy, so if your health changes and you find it difficult to get life insurance elsewhere, you may have the option of keeping the full death benefit and converting your term insurance to permanent insurance without having to re-qualify medically.
With personally-owned insurance, you own the policy, not your lender. You’re free to switch your mortgage to another lending institution without jeopardizing your life insurance coverage. And if you die, your beneficiaries (subject to any rights you may have given to your mortgage lender regarding the policy) are free to choose how they wish to use the funds — to pay off the mortgage, provide a monthly income, or take care of a more immediate need. It’s your choice, not your lender’s choice. So, before you say yes to mortgage life insurance, consider a product designed to protect you and your loved ones – not your lender!
For more information about Mortgage Life Insurance and how it can benefit you and your family, contact one of the licenced life insurance professionals at North Point Investment Solutions.
Steven J. Coffey, Hon.B.A, B.Ed
North Point Investment Solutions Inc.