When you purchase a home and arrange for a mortgage you are always asked if you want to purchase insurance so that the mortgage gets paid in the event of one of the owner’s death, almost 75% say yes but what do the other 25% know that leads them to pass on this mortgage insurance?
Most of them have read articles in newspapers and magazines or read books that convinced them that a private insurance policy would not only cost less but offer some very important additional benefits compared to traditional mortgage insurance offered by financial institutions. The following table summarizes some of the primary differences between the two.
Review the Mortgage Comparison Chart
|Bank Mortgage Insurance||Term Life Mortgage Insurance|
|Bank Mortgage Insurance does not offer preferred rates for healthy people.
The older you are the more expensive premiums are – in comparison to a personal policy.
Policy is owned by bank.
You have a separate policy for the mortgage and other policies for other life insurance needs.
The bank controls the money and pays off the mortgage
Declining amount as mortgage is paid off yet premiums do not decline
Policy may be cancelled by bank
Premiums NOT guaranteed
VOID if mortgage in default
LAPSES if property is sold or if you move your mortgage to another bank
Group Policy – NO Control
When mortgages are renewed, you usually renew your insurance at the same time and if you have had a serious illness that would make you uninsurable, the bank will usually decline the mortgage insurance.
The bank’s mortgage insurance premium can change when you renew the mortgage – usually the term on a mortgage is 3 to 5 years although it could be amortized over 20 to 25 years. Ask to see the rate schedule – it will likely have different rates divided into 5 year age groups – e.g. 35-40;40-45.
If you renew your mortgage through a different bank or credit union to take advantage of a lower interest rate, you can’t take your bank mortgage insurance with you; you have to re-apply at an older more expensive age bracket.
|Healthy and fit? Save big with new preferred life insurance rates that can save 35% or more.
Over 15 companies competing for your business – get the best rates available based on your health situation.
Policy is owned by you.
You can combine all your insurance needs and get a lower rate with your own plan.
You own the insurance and it is not tied to the mortgage lender. Complete freedom to change mortgage lenders.
Level Term policies do not decline over time. If you start paying for $100,000 that is what is paid out regardless of current mortgage amount.
Policy can only be cancelled by YOU
Fully convertible (life portion)
Premiums fully guaranteed
Insured even if mortgage is in default
Portable – your insurance can move with you
YOU are in complete control
You own the policy and it is guaranteed renewable – usually to age 85 although it would be very expensive at older ages. If you have your health, you would purchase new insurance at the end of the term.
Premiums fully guaranteed.
Personal policies have guaranteed rates. They will have premiums that stay the same for 10 years or whatever term you select 10,15 or 20.
Your beneficiary can take the money if it is your own policy and take the mortgage that is to their advantage. Also If a couple owns the home, you can get two separate policies which doubles the payment to the estate if both partners die. For example, if you have $150,000 of mortgage insurance, the amount declines as you pay down the mortgage. But With your own policy, you would each have $150,000 for a total of $300,000 and it would not be decreasing. While very unlikely, it is an excellent benefit at no additional cost. You control the policy.
Are you surprised to learn the above? Does any of this cause you concern? One of the key points that many miss, is the fact that the bank mortgage is frequently not guaranteed renewable when you renew your mortgage. Many people found this out the hard way. Her husband suffered a heart attack and when they renewed their mortgage she claims she told the person doing the paper work of her husband’s heart attack. She was asked to sign here and initial there – most people have experience this with a bank.
When he died four months later the bank investigated and declined the coverage stating that she had signed that there had been no change in her or her husband’s health – one of those initials she was asked to do. However, had the person doing the application heard her comment or if she had read what she was signing and not signed, then the bank would not have issued the insurance in the first place so either way her husband could not get insurance. Had he been covered privately, first he would have had his rates guaranteed for 10 or more years depending on the term and he was also guaranteed to be able to renew the policy regardless of his health but for a higher premium. Which insurance do you want?
So having determined that you want a private policy there are several alternatives. The primary one is term insurance where the monthly premiums are guaranteed for a fix period of time – 10 or 20 years are the most common. If you purchase a 10 year term policy, then in ten years, you should ask your broker to get a new policy to cover the balance of the mortgage. If you still have your health, we can usually do it for about what you are paying for the first ten years as the principal to cover is less having paid some of it off. If you are no longer insurable, then the guaranteed renewal rate is quite high as they assume the only reason you would renew is because you are uninsurable but at least you can still purchase it. Interestingly, many people renew not realizing that they should go out and get a new quote and policy which could save hundreds of dollars.
Those who do not want to take the risk of being uninsurable in 10 years and having to pay a significantly larger premium on renewal opt for a 20 year term which will usually see their mortgage essentially paid off. They pay 25% to 35% more in the first ten years for this security.
Some people also will purchase a small critical illness policy which will pay a lump sum if they contract a critical illness. This money can pay for the mortgage for a few years or so and help with extra expenses. It can also cover your spouses lost wages if they take time off work to be with the ailing spouse.
If you do not have disability coverage at work a small number of people will also look at taking out a disability policy to cover the principal and interest payments. This is far more expensive than Critical Illness insurance so most people opt for the former. You can reduce the cost of this by limiting the period that it will be paid or waiting a number of months before it starts.
Another alternative is a private mortgage insurance policy which looks much like the bank insurance, but you control it so it does not go through renewals and it stays with you if you switch mortgage carriers. They also offer critical illness and disability insurance as part of their package, and pricing is a little more expensive for those under 35 and less for those over 35. The small added premium for those under 35 is well worth it as the rates are guaranteed into your 30’s and 40’s where the banks increase as one gets older.
There are also significant differences between these policies as well. The Cadillac of the policies covers the mortgage principal for both death and critical illness and their critical illness insurance is not just heart attack, stroke and cancer like the banks but a full line policy with 23 illnesses and medical conditions. The disability insurance will pay your principal and interest payments whatever they are at the time.
So what does all this mean to you? It is simple, let the mortgage broker do what their specialty is and then say “no” to the offered insurance of the bank, and turn to an expert in life insurance to provide you with the best brokered solutions to meet your particular personal insurance needs. At Delsan Group Inc. we help our clients get the best possible insurance coverage for their budget risk tolerance.
Delsan Group is there for you, to serve your needs in financial services, financial security and advice.
For more information, contact the Delsan Group.