Often when a person borrows money the lending institution will ask, and sometimes even insist, the borrower buy life or disability insurance to cover the loan.
It’s important to know that you aren’t required to purchase the insurance from the lending institution. In fact, it’s illegal for a financial institution to insist that you enter into a specific financial transaction, such as buying debt insurance from them, as a condition of some other transaction, such getting your mortgage application approved. There are some very important differences between mortgage insurance, which is sold by a financial institution, and life insurance, which is sold by an insurance agent. First, if you insure your mortgage obviously the balance of the mortgage is the limit to your coverage. What about possible other needs, like maintaining your family’s standard of living, or paying off any other debts? If you die and have mortgage insurance your family gets a paid-for house, but that’s not always enough.
Here’s another thing. A mortgage is naturally paid down over time. Mortgage insurance only pays off the mortgage. You may start out with $100,000 of coverage, but later on you pay the same premium for less and less benefit. The most dramatic example I know of is a family who paid their mortgage insurance for 17 years, and when the husband was killed the mortgage was paid off. Except the remaining balance of the mortgage was only $800. Let me repeat myself. They paid for 17 years. They received $800.
Another big difference between mortgage insurance and life insurance is who owns policy. With mortgage insurance the lender owns the policy. Life insurance is separate from the mortgage and is owned by the client.
Why is the ownership of the policy important? Well, what if you change lenders? Let’s say that five years from now a different institution offers a more attractive mortgage. If your mortgage is insured then when you transfer the mortgage to the second institution the mortgage insurance is terminated, and you need to reapply. With life insurance it doesn’t matter what institution your mortgage is with; if you die your beneficiaries receive a cheque.
Here’s an example. A client of mine was persuaded to transfer mortgages to another institution because of a better interest rate. He had mortgage insurance on the first mortgage, and assumed that he would have the same protection on the new mortgage. Unfortunately his health had deteriorated though, and when he went to apply for the mortgage insurance with the new lender he was declined. After it was all said and done he was left with no insurance. If he had life insurance instead of mortgage insurance he would still be covered today.
Most lenders are not insurance agents. Insurance agents have the training to determine what your income protection needs are, and the ability to find the best product to fit your unique needs. If in the above example, if my client’s lender had some insurance training instead of just some sales training he would have realized that insurability was an issue. Now my client has a need for insurance, and he can’t replace what he already had.
Additionally, there are times when retiring the mortgage is not the first priority. What if a family had $10,000 of expensive credit card debt? With mortgage insurance, the house is paid off. With life insurance the beneficiaries get a cheque, and they can choose to spend it as they see fit, which includes the option of retiring the mortgage, but also the option to direct the insurance benefit to any other use.
Finally, life insurance is often less expensive than mortgage insurance. Bottom line- life insurance is a better product, and it is often available at a better rate. If you have insurance needs talk to an insurance agent, not a banker.
