What is Mortgage Insurance?
Mortgage insurance is a solution that is mandatory when applying for a mortgage with a bank. Nine times out of ten most retail banks will require that you purchase mortgage insurance in the event that death or critical illness were too happen to one of the homeowners. Many homeowners choose to apply for mortgage insurance in the event of their death so that their family wouldn't have to suffer paying an outstanding mortgage principal that they may not be able to afford on one income.
What is Bank Mortgage Insurance?
When applying for mortgage insurance with the bank, one of the last things the mortgage advisor will ask you is "Do you want insurance to cover your mortgage?" and of course your response is going to be a no-brainer because if death or illness were to occur to yourself or your spouse then you would want your mortgage principal paid off for your family. Right?
But what most individuals/families don't do when applying for mortgage insurance with the bank is read the application and the fine print, which is something that ALL mortgage advisors wont and can't do for you at the bank. The reason for this is because individual branches are not licensed to sell insurance which means anyone who works inside your local bank branch cannot talk to you about insurance which would cause a breach of policy....So why would someone who is not licensed to sell insurance go ahead and sell you a mortgage insurance policy?....Why would you let someone who's not a licenced mechanic replace the wheel barrings in your vehicle?....You don't.
Now lets say you agree to purchase mortgage insurance because you see the importance of protecting your home and family in the event of a death. You'll now go ahead and put your John Handcock on the application which is then put into the advisors desk, and from there you'll leave happy because your mortgage insurance is "approved" and you'll feel more comfortable knowing you have mortgage protection for your family.
WAIT!!! The application is put into the advisors desk and NOT sent to the underwriting department?....I will get back to this in a moment.
Individual Term Insurance
Individual Term Life Insurance is a solution that many individuals purchase when buying their home. As previously stated, most retail banks require you to have mortgage insurance before they will fully approve you for a mortgage. This can be mortgage insurance through the bank or individual mortgage insurance through a licensed life insurance company.
The advantages of purchasing individual life insurance through a licenced life insurance company instead of bank mortgage protection is that you will personally own your insurance policy, unlike the banks where they are the policy owners and you are stuck paying the premiums. Next, individual life insurance coverage and premiums are fixed and will never change over the term of the policy, unlike bank mortgage protection where your insurance coverage is reduced by your mortgage principal, and can be cancelled by the bank without notice at any time.
Example: Your home is worth $200,000 you need $200,000 worth of mortgage/life insurance costing roughly $50 a month (depending on your age). After a year of ownership you have now paid-off a total of $12,000 of principal mortgage payments. After that year your NEW bank mortgage insurance coverage is now reduced to the same amount as your mortgage principal at $188,000, BUT, your monthly mortgage insurance premium payments stay the same as if you were paying for $200,000 worth of coverage.
Now, if you are applying for $200,000 worth of Individual Term Life Insurance coverage costing $50 a month your coverage will never be reduced, your premiums stay fixed for the complete term of the policy, and your coverage can never be cancelled by the insurance company.
Now back to the advisor putting the application in his desk and not sending it off to underwriting.
The biggest difference between bank mortgage protection and individual term life insurance is that at the time of application individual life insurance companies will immediately send your application off to the underwriting department which will approve your insurance coverage within a week allowing you complete peace of mind knowing that you, your spouse, your children, and your home is protected in the event of illness or death.
Bank mortgage protection sends your application to the underwriting department at the Time of Claim, meaning that the insurance coverage that you have been paying for has yet to be approved by the company. For example if in year four of your mortgage you had a minor stroke or heart attack and in year six you passed away and your spouse needs to make a claim with the bank to payoff the remaining mortgage balance, the bank will now take the application that you had filled out years prior and send it to the underwriting department. The underwriting department will go through the Medical Information Bureau and notice that the deceased spouse had a minor stroke/ heart attack a few years prior and 9.5 times out of 10 the underwriting department will disapprove your claim leaving your spouse having to pay the rest of the mortgage principal when you thought all along it would be paid off possibly leaving your family in financial turmoil.
To conclude, what makes more sense? purchasing mortgage protection from the bank which the bank owns that reduces your coverage year by year while you continue to pay the same initial coverage amount, or individually owning your own policy while knowing that the amount of coverage and premiums payments stay the same throughout the entire term of the policy?
Click the link to see CBC's Market place 'In Denial' which speaks about individual life insurance and bank mortgage protection.
No comments:
Post a Comment