Do you need life insurance to cover your mortgage?
Your bank would be happy to sign you up for their mortgage protection plan, but that’s not always the best thing to do.
Flexibility
- Eligibility for coverage with group insurance, like the product your bank or financial institution will offer you, is usually a ‘yes’ or ‘no’ decision; you either qualify for the coverage or you don’t. Personal coverage purchased from an individual insurer has more flexibility. If you represent an increased risk to the insurer over the standard population, they may be able to offer you the coverage you may not have qualified for at the bank. They can address the increased risk by assessing an extra premium or by offering the policy with an exclusion.
- With bank insurance, when your mortgage ends, so does the coverage. Individual term insurance provides you with the guaranteed option of converting the policy to permanent insurance without evidence of insurability, should you desire permanent insurance.
Ownership
- Insurance you purchase from your lender is owned by your lender, not you. The lender is also the sole beneficiary of the proceeds. This leaves you without any control over the policy. For example, you cannot name a secondary beneficiary, and you cannot transfer ownership of the policy to your corporation. If you change mortgage providers in the future, the coverage terminates and you will have to apply again with your new lender.
- A policy purchased through the individual marketplace is owned by you, and you have control of it. You can make changes to the policy by, for example, defining the beneficiary, owner or coverage amount.
- A personally owned policy is portable. If you change your mortgage provider in the future, the policy stays with you, not the bank. When your mortgage obligation is paid off, you still have the policy to use as you see fit. It could be used to cover another financial obligation, or left to your chosen beneficiaries.
Cost vs. Benefit
- Should you meet your demise, the beneficiary of your individually owned policy can use the proceeds to pay the amount outstanding on your mortgage, and they will have free use of any remaining funds. With bank insurance the benefit amount decreases as you pay down the principal on your mortgage, yet you will continue to pay the same premium as when the coverage was initially issued.
- In most cases, individually obtained term life insurance has a more economical premium than the bank’s insurance. Why keep paying the same amount for coverage that decreases as you pay down your mortgage?
It may be easy when you are reviewing your mortgage needs with your lender to accept the coverage they offer, but wouldn’t you rather have flexibility in coverage, control of your policy, and pay less for it? When it comes to mortgage insurance versus term life insurance purchased independently, term life is usually the handsdown winner.