Mortgage Life Insurance vs. Individually Owned Life Insurance

The purchase of your home is one of the biggest financial decisions you will make and with this purchase, typically you will have a mortgage for many years to come. When applying for or renewing your mortgage the bank or your mortgage broker will probably offer you mortgage life insurance to protect the mortgage amount in the event of your death. They most likely will talk about disability and critical illness protection as well. Although it is important to protect against these risks, the bank offered insurance may not be the best solution.

THE 3 PRINCIPAL BENEFITS OF INDIVIDUALLY OWNED LIFE INSURANCE POLICY

You Own the Policy

You own the policy. With mortgage life insurance, the financial institution owns the policy. If you own the policy, you can decide where the proceeds go. Maybe your beneficiary does not need to pay off the mortgage. You get to choose! With ownership comes control.

you control the beneficiaries

The owner of the policy gets to decide the beneficiary. With mortgage life insurance, the mortgage issuer is the beneficiary. If you own the policy, you control who the beneficiaries’ are and who receives the proceeds.

your Policy is portable

It is worth noting mortgage life insurance from a bank is hardly portable. If you decide to switch lenders, a new policy must be taken out, and you will have to answer their health questions again. An individually owned life insurance’s portability is not questioned because it is not attached to your mortgage, and once you’ve gone through the underwriting process you do not have to again. A new policy may mean higher rates!

 MORTGAGE OWNED LIFE INSURANCEINDIVIDUALLY OWNED LIFE INSURANCE
OWNERSHIPThe lender owns the policyYou own and control the policy
BENEFICIARYThe lender is the beneficiary
and receives the proceeds
upon your death.
You get to control who are
beneficiaries of the policy
proceeds.
PORTABILITYIf you change lenders, you
will have to re-qualify for the
insurance and most likely pay
a higher rate.
If you change lenders, there is
no affect on the life insurance
policy
UNDERWRITINGWith this type of insurance,
the underwriting is done after
the claim has been
submitted. This means you
could have a policy in force
for a very long time and be
denied coverage after having
paid many premiums.
All underwriting for this policy is
done at the time the application
is submitted. When the policy
is approved and put in force,
the insurer cannot cancel the
policy (unless you
misrepresented yourself on the
application).
REFINANCINGIf you refinance your
mortgage, you will have to
re-qualify for the insurance
again.
The insurance policy is not
attached to the mortgage, so
refinancing will not effect the
policy
DECREASING
COVERAGE
The insurance coverage is
only for the outstanding
mortgage amount. Your
insurance premium will
remain the same even though
your outstanding loan
amount (and insurance
coverage) is decreasing.
Only the owner, you, can
change the face amount of the
policy. Any decrease in the
face amount will also decrease
the premium to be paid.
GUARANTEESThis insurance may allow the
lender to increase or change
the insurance rates or cancel
the policy on a group basis.
Once underwritten, rates and
the face amount are
guaranteed not to change.

Additional Considerations

With mortgage life insurance, you are only covered for the outstanding balance of the mortgage. As for individually owned life insurance, you can include a range of other needs beyond the mortgage such as final expenses, children’s education or income replacement. Working with an independent financial advisor will allow you to discover the full amount of life insurance you require to protect you and your family

Just because you answered a few questions does not mean you are covered.

With mortgage life insurance, the issue process is very simple. Once you’ve answered yes or no to a few medical questions, the policy is issued. This straightforward process does come with a cost. Just because you answered the questions and were paying the premiums, it does not guarantee your coverage. These types of policies often use a method called post-claim underwriting. When a death claim is submitted, the insurance company goes back through the insureds medical history. If they find a discrepancy, the claim could be denied. Even after paying the premiums, you are not guaranteed to have your mortgage paid off. There have been many reports by media outlets concerning this. CBC’s Marketplace has done an in-depth report on mortgage life insurance titled In Denial.

SEEK PROFESSIONAL ADVICE

There is no contention that a home is the largest financial commitment any family has to make. Ensuring a home is protected in case the primary breadwinner passes on should be a top priority. You must protect your mortgage with the right life insurance, one that meets your requirements. An independent insurance professional can help you with that.