Mortgage Insurance: Bank vs Life Insurance Company – Why they are different
Having just recently moved into a new home, I remember signing the mortgage documents and was amazed how the bank tied the mortgage insurance questionnaire into the contract. I had to take a second look to make sure that I had read the document properly. I forgot about how easy it is to get mortgage insurance within that contract and got angry that I had to sign that portion of the contract anyway (even though I refused the mortgage insurance).
Before becoming a broker, I refused the mortgage insurance because was always told to do that – As a broker, I feel it necessary to outline the difference between the bank and insurance companies – so that you can take control of your own destiny for your spouse and /or kids.
Newsflash: Mortgage insurance is life insurance: The coverage usually declines over time as your mortgage decreases (I would recommend other options than declining benefit, but this isn’t the article for that and it also depends on your personal situation)
Below are 2 lists outlining some of the key differences between getting the mortgage insurance from the bank and taking out your own life insurance policy through a life insurance company. Read them over, ask any questions that come up and make an informed decision. For most of us, our home is our biggest investment – let’s make sure it is still there for our family should the unexpected happen.
1. (Typical) Bank Mortgage Insurance Policy Features:
The policy:
Is a group policy
You don’t own it
You have no control
Is underwritten at claim time
Can be canceled by the bank and/or the group underwriter
Is non-transferable to another bank or mortgage
Coverage:
Is equal to the outstanding mortgage amount – as your mortgage decreases, your coverage decreases very few additional benefits can be added
Premiums:
Not Guaranteed
Payout:
Money goes to the bank
2. (Typical) Life Insurance Company Insurance Policy:
The Policy:
Owned by you
Can only be canceled by you – in writing or if you stop paying for it
The policy is transferable
The policy can be convertible to whole life insurance (depending on the policy you choose)
The policy is underwritten at the beginning – if you are approved, then you are covered.
Coverage:
Can decline with your mortgage (but seriously – many people don’t choose this option – level coverage is pretty common in my experience)
You can get benefits like: disability waiver of premiums, critical illness rider etc.
Premiums:
Are commonly Guaranteed – you would enter into a contract that is 10 or 20 years of level costs and coverage
The Payout:
Goes to whomever you wish it to go to. For example: If you want the funds to go to your spouse and if they wish to pay off a portion of your mortgage then they have that flexibility.
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January 22nd, 2008 at 3:55 am
Banks have policy in set and you dont have to fear of loosing money while in case of lending institutiins you are not sure when they disapper taking all what is yours
January 22nd, 2008 at 8:46 am
Thank you for your comment,
Actually I believe we are speaking about different things. The comparison I am making is between life insurance policies underwritten by our banks here is Canada in comparison with the life insurance policies underwritten by the life insurance companies.
The post was taken from literature I obtained from a life insurance company. I filtered out the bias and tried to demonstrate the key differences between mortgage insurance offered by Canadian banks and Canadian Life insurance companies without a bias slant.
In terms of the ability to lend money, I cannot intelligently make the comparison between banks and other lending institutions because I am not trained in those matter.
December 1st, 2008 at 9:47 am
Now, how about when we add in the Mortgage disability Insurance into the mix. We’re told it is much cheaper to have death & disability insurance on our mortgage than trying to secure death & disability privately, even though life insurance alone would be cheaper elsewhere.
My situation is that I work for the Federal Government and will receive 70% of my salary if I become disabled. The amout provided by my plan will top up from any government UI or disability insurance program to the 70%.
So should someone in my position consider additional diability insurance?
My own answer before was no. However, in the case where something should happen it would be nice to keep a large percentage of my salary and have my mortgage payments paid off.
And finally, for clarification, as I am a co-applicant, if only I become disabled does the mortgage forgiveness (or however it works) kick in because my wife would still be working full time?
December 2nd, 2008 at 10:27 am
Hi Rob,
Thanks for your comment – the basic rule of thumb that I go by is this: the more underwriting performed up front, the less chance of denying payout later.
In order to evaluate the cost – effectiveness of the death and disability options, we have to compare the definitions. Often the death and disability product sold on the plans for the mortgages are Accidental Death and Dismemberment not a disability plan – disability plans offer payouts over a long period of time to supplement lost income and to rehabilitate you, whereas an AD&D policy pays out set sums for certain impairments.
Privately – disability plans doesn’t have to be pricey, but that all depends on how you structure it .
Typically, a disability plan compensates you for 66 and 2/3 of your lost salary – you seem to have that already.
I can speak to you privately regarding your specific situation (which is probably favorable).
There are other avenues that you may wish to consider – coverage like Critical Illness can be a very powerful protection for your mortgage as it gives you a big payout when you survive the diagnosis of insured diseases (some which can result in a long term disability).
Also, you may wish to eventually consider solutions for post retirement – such as Long Term Care coverage.
I can only answer your final point from a agent perspective- I don’t know the wording of the bank policy well enough to officially comment on it but typically a disability policy is written on each person’s life – the income would replace their portion – so you would get your income replaced, proportionately.
The mortgage forgiveness programs have allot of fine print written into them, and you would be well advised to read it carefully and possibly consult a professional and have them review it with you.
November 25th, 2009 at 9:20 pm
Just wondering if you have any idea what the top ten reasons insurance companies refuse coverage to a seemingly healthy 34 year old man would be ?
November 26th, 2009 at 10:26 am
Hi Amy,
Unfortunately I don’t – there could be any number of reasons. You can write to the underwriter and ask them to provide your doctor an explanation for why the gentleman was declined for the coverage applied for. Once you determine this, you will then be able to take the next steps in finding coverage for him.