You're sitting in an office across from a mortgage loans officer. It could be in a bank, a credit union, or another lender. You've signed all the papers for your mortgage.
Now comes a question that you haven't thought about: "Would you like to have mortgage insurance?"
"What's that?" you ask innocently.
"If you die, we'll pay off your mortgage so your spouse or family doesn't have to worry about it."
You, like many others, are tempted to respond, "Where do I sign?"
But wait a minute! Think about what you're paying for before you put your name on that mortgage insurance document. You need to be careful and attentive when choosing your options. Every mortgage is different, but knowing the basics of how it works is something we all need to learn as we grow. After all, the majority of us want a stable home for ourselves, and that means we need to be educated about the topic
Put yourself in charge
The major difference between a life insurance policy and mortgage insurance from a mortgage lender is control. With a life insurance policy, you decide who the beneficiary will be; with mortgage insurance, the financial institution is the beneficiary and gets all of the death benefit.
Your appointed beneficiary gets to choose how to spend the tax-free death benefit from your life insurance policy. That could be to pay down the mortgage or other debts, invest rather than pay off a low-interest mortgage, cover living expenses, or make important purchases. These options don't exist when your mortgage lender controls the proceeds.
Many homeowners don't realize that mortgage insurance is often what's called "decreasing term insurance." The amount you owe on your mortgage goes down as you make payments on the principal. At the same time, the death benefit–the amount required to pay off your mortgage–goes down by the same amount. But your mortgage insurance premiums stay the same, so you're actually getting less and less for your money every time you make a mortgage payment.
Here's another point worth considering. Many homeowners will change the mortgage lenders during the time they're paying off their home, especially if they can get a lower interest rate somewhere else. If you take your mortgage to another company, in most cases, you lose your mortgage insurance and have to apply again at the new company.
In short, you lose control, value, and flexibility when you sign for mortgage insurance with your mortgage lender.
An alternative to consider
Using an individual life insurance policy to protect your mortgage offers numerous advantages. It's important to note the difference between an "individual" and "group" insurance policy. With mortgage insurance, you're a member of a group–a collection of people who have mortgage debt with the same lender. The lender or insurer may cancel a group policy at any time, and that means you'll lose your coverage.
With an individual life insurance policy, you're in control, so you're the only person who can cancel or alter your policy.
Another benefit if you choose the life insurance route: the value of the death benefit doesn't decrease as you make mortgage payments. A life insurance policy with a face value of $100,000 will be worth that much as long as you make the premium payments.
Control leads to flexibility
If you have a life insurance policy to protect your mortgage, and a better rate exists at another company, you can transfer your mortgage to that company knowing your insurance remains in force. You don't need to re-apply, and you're protected from the danger of losing your insurance because of a change in your health.
Recent articles have pointed to lower premiums as being a good reason to choose mortgage lender insurance over life insurance coverage. They'll tell you that it's much cheaper to cover your mortgage with a bank policy, rather than an insurance company's policy. That's not always the case. Depending on the policyholder's age and the face value of the insurance policy, individual life insurance coverage may be cheaper than the lender's mortgage insurance. It's worth talking to an advisor to see how the policies compare.
Articles supporting mortgage insurance have indicated the lender probably won't ask you to fill out a medical questionnaire. If you're applying for a large mortgage, however, banks in particular will likely demand that you fill out a more detailed health application, and perhaps ask for a blood or urine sample. Usually the more detailed medical information required by insurance companies actually protects you. If you don't fill out a medical questionnaire with a lender, that lender could use a serious medical condition as a reason to refuse to pay your beneficiary.
In short, these articles often fail to explain the benefits of value, control, flexibility, and security when an individual life insurance policy covers mortgage debt.
The final choice is up to you. Weighing your options will help you get the most out of your money.
By Dulari Shah, CLU, RHU
Associated with SunLife Financial
Dulari Shah is an advisor with Sunlife Financial. She is in the business of establishing long-term relationships with her clients. Dulari, helps her clients achieve and maintain customized financial programs. She can be reached via email Dulari.email@example.com or 416 366 8771 ex 2219