Mortgage (Creditor) Insurance
Posted 19 Aug 2014 by Melissa Allan
If you have a mortgage on your house then you may have mortgage insurance (or "creditor insurance") with the bank. If you die while you have a mortgage and you purchased this insurance, the purpose is for it to cover the mortgage debt so your loved ones won’t carry the burden at such a time of loss. Today, I wanted to share with you a few things to be aware of about this type of insurance. According to a CBC marketplace study done in 2008, many individuals who sell mortgage insurance through the banks are unlicensed. In addition to not having a license, many are not formally trained to explain the details and legalities of those insurance products.
Several other disadvantages to purchasing the banks mortgage insurance are as follows:
- If at renewal you change the bank who holds your mortgage you lose your mortgage protection coverage and have to re-apply with your new bank. This means new rates and new questionnaires. Typically, the maximum an individual locks in their rate for is 5 years on average so this means you could be looking to re-apply every 5 years. The fact this coverage is not portable is a big disadvantage.
- Your premiums remain the same but your coverage is always decreasing as you pay down your mortgage.
- If the insured dies while there is still a mortgage the mortgage gets paid off 100% of the time. Sometimes, the beneficiary would like the option to keep the mortgage going and they would have preferred to use the insurance for something else.
An alternate to this type of creditor insurance would be a personal term insurance policy. Term insurance typically expires between the ages of 75 and 85 (depending on the carrier) and rates renew every 10 or 20 years (depending on the term you choose). There are several advantages of owing a personal term insurance policy when compared to the banks mortgage insurance.
- The coverage will continue until it expires as long as your premiums are paid each month regardless of your health situation as most policies are set up to be guaranteed renewable and convertible. So even if you change banks you never have to worry about losing this coverage.
- Your death benefit remains level. For instance, if you have a policy for $250,000 and at your death your mortgage is only at $100,000 then the surviving beneficiary can decide whether they would like to pay off the mortgage and keep the rest for other things.
- Your beneficiary may not even want to pay off the mortgage, it may make financial sense for them to continue it depending on their personal circumstances. The choice is theirs to make whether they use the money for retirement, for their grandchildren’s education, many vacations, etc.
- Most term insurance policies have a built in conversion option. This option allows them to convert all or part of their insured death benefit to a permanent type of insurance down the road regardless of their health situation. Note, this option is typically built into most term insurance policies but does expire (typically at age 60 but all carriers are slightly different). Let’s say 5 years into a personal term policy you get diagnosed with an illness that means you are uninsurable. This may change your outlook on life and you may want to purchase a small amount of permanent insurance to leave a loved one. With your conversion option, you can do this regardless of your diagnosis.
Pricing tends to be a large part of many people's decisions when looking at these products as it is with most things in life.
It is my experience that many times a personal policy can actually cost you a little less than the bank’s insurance and it has all of these advantages!
For some people, the bank’s insurance may be their only option or it may be worth keeping. I personally would never recommend anyone cancelling existing coverage until they were approved with a new policy in their possession.
Always talk to a licensed professional about insurance coverage -- if you have questions, give us a call!