If you’re a homeowner, chances are you were offered mortgage life insurance from your bank or lender. But what does it cover and how does it differ from a personal life insurance policy? Most importantly, is it worth it? We want to make sure people have protection.
Mortgage life insurance is tied to a mortgage and offers protection if you can’t make your payments. In the event of a disability, job loss, critical illness or death, mortgage insurance can help your family keep their home by making the mortgage payments for you.
From a consumer standpoint, mortgage life insurance offers homeowners added peace of mind and a sense of security. Banks will always offer mortgage life insurance as an option, but it’s up to consumers to decide if it’s worth the cost.
All financial institutions will provide information and advice on their insurance products, and it’s really up to the customer if they want to take it. Some customers may have insurance from other providers. They have to make the decision if that’s enough.
Many homeowners don’t realize mortgage life insurance technically protects the bank–not you or your personal interests. For additional protection in the event of your or a spouse’s death, for example, you might also want to consider personal life insurance.
It makes sense for people who feel they don’t have enough existing coverage and want to make sure they’re protected in case something happens. Mortgage life insurance, which is sold through banks or lenders, sounds like a great idea—but read the fine print, as it may not be your best option.
There are a few features of bank-owned mortgage life insurance homeowners should be aware of. First, mortgage life insurance is non-transferrable. If you move, the policy is cancelled and the premiums you’ve already paid are lost.
Second, monthly premiums remain the same throughout the policy term, even though the potential payout shrinks. That’s because the amount owed on your mortgage decreases as it’s paid off, so the amount owed (and covered by the insurance) also decreases over time.
Consumers should also note mortgage life insurance typically practices post-claim underwriting, which determines whether or not you’re qualified for insurance after a claim is made. The banks can deny your coverage years after you’ve been paying your premiums. Few mortgage life insurance policies are medically underwritten at the time you apply for them, so insurance companies can turn down your claim if they think there was a misrepresentation on the application.
In 2008, CBC Marketplace ran an episode called, “Mortgage Insurance: In Denial” highlighting the risks of mortgage life insurance. One Canadian family, who had been paying their premiums for nine years, was denied a claim after the insurers insisted they should never have qualified in the first place because of the husband’s medical history.
In many cases, getting term life or regular life insurance is more affordable, easier and more flexible. While premiums for this insurance also remain constant, the payout doesn’t shrink over time and you’re not limited to just paying down or off your mortgage.
Of course, there are always exceptions. Mortgage life insurance—and its near-instant approval—makes sense if you have a disability, disease or lifestyle that makes it difficult, if not impossible, to obtain other insurance.
Remember banks and lenders can issue mortgage life insurance and deny coverage years later, so, if necessary, ask for the policy to be medically underwritten at the time you apply.
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