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7 Disadvantages of Mortgage Insurance

Buying a new home can be a great experience - especially if it's your first time. One thing that banks love to do is tie mortgage insurance into your mortgage agreement, right along with a form to sign and accept the insurance, but I want you to walk out from that Bank’s / lender’s mortgage broker's office, decline and sign that line and leave with total confidence.

What the banks don't tell you is that you may be far better off buying a life insurance from a broker instead of that mortgage insurance.

"But please be perfectly clear that it doesn’t mean you don't need to insure your mortgage."

In most circumstances, an ordinary term life policy will do far better.

  1.  Underwriting
     It simply means that your insurance is "underwritten" to determine if you qualify. Assuming you do, your cost of insurance is based on your age, health, activities and pre-existing conditions, but as long as you qualify and pay your premiums, your coverage is guaranteed and the policy will pay out. The bank's mortgage insurance may use "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 wind up paying nothing. This practice seems terrible, but apparently it really happens, so buyers please beware.
     
  2.  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.
     
  3. Premiums
    With mortgage insurance, everyone pays the same premium. There are no discounts for, say, being a non-smoker or being healthy (or being a woman who will statistically live longer). So, you're usually not getting the best deal. Even if you aren't a chain smoker who eats a pound of bacon every day, you probably still aren't getting a better deal. In fact, you may be paying for nothing.
     
  4. Declining Benefit
    The bank's mortgage life insurance benefit value declines as you pay down 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.
     
  5. Beneficiary
    With mortgage life insurance, the beneficiary is the bank -- with personal life insurance, you get to name your beneficiary. You (or rather, your beneficiary) will have the flexibility to choose how to spend the money. They may not need it to pay off the mortgage. They could choose to invest the money or just spend it for something else. In general, though, this means better financial security for your loved ones.
     
  6. 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 adviser will determine that. Your mortgage lender will not bother with this and always cover the full mortgage amount.
     
  7. Conversion or renewal option

    With private term life, you can convert part or all your insurance to a permanent plan like whole life or universal life for other purposes, or renew it at the expiry of the term.

 

Finally, remember it isn't just an untimely end that you need insurance for to protect your mortgage and your family. Make sure to consider disability and critical illness insurance in case you become unable to pay your mortgage due to serious illness or injury.

 

Farah Jahed

Senior Financial Advisor, Insurance Broker
In Guaranteed Investments

Chartered Life Underwriter (CLU)

Certified Health Specialist (CHS) 

Member of the Million Dollar Round Table (MDRT)

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