Buying a house is one of the biggest decisions of your life, and can often be a daunting or overwhelming experience. And one of the biggest decisions that comes with buying a house is picking out a good mortgage. Often you will get your mortgage from a trusted financial institution or a mortgage broker. However, when it comes to finding a mortgage there are so many different aspects you need to look into. After you have made the decision you will still be bombarded with more and more information, and sometimes you will be asked to make a snap decision to carry mortgage life insurance, which will help cover your mortgage should something happen to you. On the surface this seems like it would be a good idea, but lets dig a little deeper into the mortgage life insurance product and why it may not be right for you.
What is Mortgage Life Insurance?
Mortgage life insurance or mortgage protection insurance is not the same insurance you are required to carry when your down payment is less than 20%. It is also not the same as home insurance, which is required by your mortgage provider. Instead, it is a voluntary coverage option and it is typically presented by the lender of your mortgage. The policy is designed to cover your mortgage payments if you were to pass away or become seriously ill. It is a set payment for the term of your mortgage and just gets included with your mortgage payments. Sounds pretty good right? Well, not so fast. This all sounds well and good, and is likely the reason so many people agree to the insurance, but it’s not all it is cracked up to be and here’s why:
Protects the Lender Not the Borrower
The biggest knock against mortgage insurance is that it is designed to protect the lender, not the borrower (that’s you). This means the bank, not your family, will be the one who pockets the payout should you pass away while the mortgage is active. Of course your family won’t have to worry about mortgage payments if you die or become disabled but this isn’t always the best solution. For instance your family could sell the house to get ride of the mortgage and use the money for other purposes.
It is true the coverage protects the amount of your mortgage, but as you continue paying down your mortgage your coverage decreases. However, your payments are set a fixed rate for the length of your mortgage term so even though the payout is less and less your payments will stay the same. When you initially received the coverage and your mortgage was $400,000 it seemed like a great idea but now you are half way through your term and are still yet to have a claim. Your payments stay the same for the entire term despite requiring less coverage. Now suppose something happens, you will only receive coverage for the outstanding debt of $200,000 in this example. With a personal life insurance policy you receive the entire coverage amount regardless of when the claims occurs, it does not diminish over time.
The other portion of a mortgage life insurance policy you need to be wary of is; it is typically underwritten post-claim. What does that mean? Well, it means that your eligibility for a payout is determined only after a claim has been made. So despite the fact you have been paying the premiums all along, you may be denied your payout. Just ask Christopher Massa’s family, who found out after he passed away from lung cancer, that they would be denied because of his health condition. With a personal life insurance policy it is underwritten before the policy is issued so this does not occur.
Lack of Flexibility
There is no flexibility with the money, it will be used solely to pay off the remaining amount of the mortgage. And remember that payout is going directly to the bank. You would still need a separate life insurance policy to consolidate your other insurance needs such as income replacement at death, childcare, benefits plan, disability etc. With a personal insurance policy you can cover whatever makes sense to you. It could be your mortgage, it could be money for your loved ones, the options are available for you to make a decision on. With the mortgage life insurance through the lender that simply isn’t available and you would have to carry different insurance policies to cover the rest of your needs.
Plain and simple mortgage life insurance provided from the lender is simply not worth it.
What is a better solution?
We do agree that buying insurance that can be used to pay off your mortgage is important, but it needs to be purchased from an insurance company, not a lender. With a life insurance policy there are several benefits over a mortgage life insurance policy from a lender. To find out more about what the benefits are of having a personal life insurance policy that can be used against your mortgage, contact our life and financial services team.