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 life insurance?"
"What's that?" you ask.
"If you die, the mortgage life insurance will 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 getting before you put your name on that mortgage life insurance application.
Put yourself in charge!
The primary difference between a life insurance policy and mortgage life insurance from a mortgage lender is control. With a life insurance policy that you own, you decide who the beneficiary will be; with mortgage life insurance, the financial institution is the beneficiary and gets all of the death benefit.
With life insurance, your beneficiary chooses 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 life insurance is actually 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 of the mortgage life insurance goes down by the same amount. But your mortgage life insurance premiums stay the same, so you're actually getting less coverage for your money every time you make a mortgage payment.
Here's another point worth considering. Many homeowners will change 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 life 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 life 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 could 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 mortgage 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. You're protected from the danger of not qualifying for a new life insurance policy if your health changes.
If price is a concern, be sure to consider all your options and what value you get for your money. Depending on the policyholder's age and the amount of the insurance policy, individual life insurance may be cheaper than the lender's mortgage life insurance. It's worth talking to an advisor to see how the policies compare.
Articles supporting mortgage insurance rather than a policy to protect your mortgage 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.
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.
Sun Life Financial Advisor,
Waterloo Grand Financial Centre
94 Bridgeport Rd E
Waterloo, Ontario N2J 2J9
Ph: 519-885-4000 ext. 2220
© Sun Life Assurance Company of Canada, 2011