Insurance Broker Canada | The Drawbacks With Mortgage Insurance
Mortgage Insurance from the Bank is weak Life Insurance
. The Bank Owns and Controls Your Life Insurance!When you are buying your first home or upgrading to a new home in Grande Prairie, you probably need a mortgage. The bank loans officer signing the mortgage documents with you will offer you their mortgage life insurance protection. The question many Albertans ask themselves is, Is this a good life insurance protection?
If you approved the banks mortgage insurance, you either have not looked the different types of life insurance or you have been too eager to get your own protection and cancel the banks plan. If you don't understand the limitations of banks mortgage insurance, this article will spell it out to you. If you do know, consider this a wake-up call to get your own life insurance policy and cancel the banks inferior plan.
You pay the premiums to protect the bank with mortgage insurance
Consider 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 want YOU to pay the premiums for them. How convenient!
Most businesses would try and insure themselves against loss when a business transaction builds 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 remarkable piece of marketing says that you the home owner is protected from loss the moment you die and cant 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 you have no money in your account. This can be the case if you died and left your family with a paid off house with no liquid cash to take care of the day-to-day finances. When someone dies, cash is king, because the survivors need money to pay the bills.
The premiums are level but the benefit declines
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 declines. Every time you make a mortgage payment you cut down the principle owing on the mortgage. Good news! But this also indicates you lessen your life insurance coverage since the banks 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 reduced as your mortgage lowered this would be fairly fair but thats not 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 complete 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 switch 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 a choice with the banks 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 banks mortgage insurance either. Remember, the bank owns the policy not you. They have control over it and they dont permit 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 likelihood you will be dropped 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 buy 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 then you're older, the premiums for mortgage insurance just went up.
Blended rate premiums for mortgage insurance
The banks mortgage insurance does not provide lower premiums for non-smokers and higher premiums for people who want 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 banks 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 banks mortgage insurance if you owned a personal life insurance policy.
Post claim underwriting on mortgage insurance
I have left the most risky 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 have to go through 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 visualize that the importance of the medical questions is not taken seriously.
But, if you ready the questions properly, there is probably something there that might trip you up. Even consulting a doctor in Mexico because you had a stomach infection 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 covering questions. If there would have been a YES answer to any of these questions, your claim gets rejected! 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 far too common 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 initial 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 must ask a series of medical questions and is licensed and trained to record 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 suitable life insurance vs. the bank
If you want to get rid of the banks mortgage insurance or would just like a review of your plan, kindly give us a call. We will find you a qualified broker in Grande Prairie that can reveal to you the benefits of personal life insurance vs. the banks mortgage insurance.
by: Mitch Reynolds
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