“Take this life insurance for on your mortgage and the bank will give you a discount of…” Heard that before? If you have started shopping around for a mortgage, it is likely you were told this from the bank representative. I would like to offer some advice to ensure you have all the information before you sign on the dotted line.
1. Expensive. In general, I have seen most people can save 25% or more if they purchase a life insurance outside of the bank mortgage insurance. Who would not like to pay less on something they will not use? Remember, life insurance is the most selfless act, you will never receive the coverage, only your loved ones.
2. Decreasing coverage. The bank essentially covers their mortgage balance, therefore, as the loan decreases, so does the insurance. It would be nice if your premium would decrease, however, the premiums do not follow. Why would you pay for decreasing coverage? Life insurance contracts do not decrease unless you request them to. In a traditional life insurance, if your coverage decreases, as do your premiums.
3. Loss of negotiation power upon renewal. Imagine you want to leave your bank for any number of reasons. If you have mortgage insurance, and you do transfer, make sure the new bank will provide an insurance approval PRIOR to you cancelling your current mortgage. Your mortgage insurance is automatically cancelled when you pay off your mortgage, and this apply upon transfer as well, as your current bank will be paid in full by your new bank.
a. The complexity increases if you are no longer eligible for insurance. Each time you refinance, you must “maintain” your coverage, or risk losing your coverage all together. If you leave your current bank, and do not know you need to get approved prior, you will lose your insurance. Try to leave the bank after you had a small health issue that will no longer allow you access to the insurance you thought you had?
4. The bank is the beneficiary. The bank is the sole beneficiary of your life insurance. You are protecting your family from not paying a mortgage, however small, and protecting the bank. They will receive the money no matter what. What a great proposition for the bank. Even in a disability or critical illness, the bank receives the money, no you. I would prefer to control the money, and at the very least, have my loved ones decide how to spend their money.
5. Underwritten at time of claim. This is a BIG factor to consider, however, most people, including your banker, do not know this. This is a scary proposition; allow me to expand on this. The borrower, that is you, will typically answer yes or no to 4-8 questions. If you answer all the questions according to the bank’s satisfaction, you receive an approval. You feel good thinking you have an insurance to protect your family.
a. Actually, this is not the case, you have a privilege to an insurance policy. Only upon death, disability, or critical illness, known as “time of claim” will the bank consider your medical history. This is the big problem. These questions are often very vague, and confusing. If you told the truth, answered the question as you understood it, however, did not realize they were referring to the urinary tract infection, bronchitis, etc, you will be declined your coverage. You will receive the benefit of your premiums back, maybe with some interest, or not.
b. Check out CBC marketplace investigations here:
Working at the bank in the past, I remember recommending this product, I had no choice. However, I always had a cancellation letter waiting for my clients. My advice was, “This is not the best out there, do your homework, find something better, and I will personally help you cancel the insurance, here is the letter.” Sadly, in all my years at the bank, no one ever took me up on that offer. I shudder to think how many people are out there with a false sense of security, due to me, due to the pressures to sell at the bank, etc.
I also fell into this myself when I purchased my first home with my wife. The banker at the time asked us the medical questions and due to our past we ere not approved and needed to provide more medical details. I asked the banker, “If we do not provide these forms, then you will not charge the insurance, since we are not approved, right?” He responded emphatically “no, of course not”. After 8 months, I received my annual statement and noticed a charge if 800$ for life insurance. After about 4 months, countless emails, I was finally refunded the money. Be careful! I have provided a case comparison if you are interested in learning more, simply click here .