If you own your home, chances are you were offered mortgage life insurance from your lending institution during the mortgage negotiations. This type of insurance is sold by lenders as a flexible, low-cost way to protect one of your largest financial obligations. The idea is that if you should become seriously ill, or die, before paying off the mortgage, the coverage will kick in and pay it off for you. The intent is to help ensure that your family will be able to stay in your home if anything should happen to you.
However, this type of mortgage life insurance is most-often approved on a post-claim underwriting basis. This means that medical records are only scrutinized when a claim is made against the policy. If at the time of your death, the financial institution determines you may have had a pre-existing condition, you may not be covered.
This kind of mortgage insurance usually covers the exact amount of your mortgage, so your coverage decreases as you pay down your mortgage. When your mortgage is paid off, you’re left without coverage.
For instance, the monthly mortgage life insurance premiums for a 33-year-old male, with a $500,000 mortgage from RBC, are $65. After five years of payments, the outstanding mortgage balance and death benefit could be reduced to $450,000, yet you will continue to pay the same mortgage life insurance premiums. This “declining benefit” means that the cost per $1000 of insurance actually increases each year.
The alternative to the mortgage life insurance offered by most financial institutions, is personal life insurance. A $500,000, 20-year term life insurance policy (in this case through London Life Insurance Company) could cost as little as $40 per month for a 33-year-old male non-smoker. After 19 years of payments the death benefit would still remain at $500,000. With a reduction in the outstanding mortgage each year similar to what would occur in the example above, a death benefit would provide additional funds for other surviving family needs.
With mortgage life insurance, the lender is the owner of the policy and the beneficiary. You’re paying premiums on a policy you don’t own, and in the event of your death only the mortgage will be paid off. Because the lender owns the life insurance, if you find a better mortgage rate at another lending institution, you may have to re-qualify medically for the life insurance protection. Typically, your mortgage insurance can’t be moved to another institution.
Another advantage of personal term life insurance is that when you die, your beneficiaries (subject to any rights you may have given to your mortgage lender regarding the policy) are free to choose how they wish to use the funds – to pay off the mortgage, pay funeral expenses, provide for your children’s post-secondary education, replace lost income replacement or take care of other debt obligations. It’s their choice, not your lender’s choice.
Your financial security advisor can show all the advantages of protecting your home and family with personal life insurance, as part of complete financial security plan.