Mortgage insurance need not be bank's
Published by the Globe and Mail
Tuesday, May 9, 2000
If you think of your mortgage as a ball and chain, just imagine the burden it could be if you died. There are your loved ones, stuck with this monster debt to a financial institution that's as likely to cut some slack as a piranha is to pass up on a sirloin steak.
It's in this frame of mind that many people make the error of replying with a quick yes when asked by a lender if they'd like to have life insurance on their mortgage.
These days, no one arranges a mortgage without being hit on about mortgage insurance. In many cases, a banker will integrate the premiums into your total mortgage payments-- "Let's see... $100,000 at 7 per cent for one year means a payment of $700 per month, plus mortgage insurance brings your total payment to $725."
To compound the problem, you may find you have to sign a document should you choose to refuse mortgage insurance. It's as if buying this insurance is the natural way of things and you need to sign off on the alternative because it's such a foolish thing to do.
Don't misunderstand here -- having enough insurance to cover your mortgage debt is essential and, if you're just not going to bother checking out alternatives, then by all means say yes to the bank's offer of insurance.
But if you want to buy the most effective coverage possible, tell the bank no thanks and then call up an insurance salesperson or broker for a quote on a plain old term life policy.
There are several benefits to term insurance, the most notable being flexibility.
When you sign up for bank-offered mortgage insurance, the beneficiary is the bank. You die, the bank gets paid and the survivors keep the house without a mortgage.
With a term life policy, you can make anyone the beneficiary. Just as importantly, that beneficiary can do whatever he or she wants with the money paid out by the policy.
Say you die at a time when you have a mortgage at an attractively low interest rate. Your family may not want to pay it off, perhaps they?d rather invest the insurance money, or use it to pay monthly expenses or start a business or take special job training, or whatever.
With a term policy, this latitude exists. With a bank-offered policy, forget about it.
Your term coverage also stays with you regardless of what you do with your mortgage. If you renegotiate your mortgage or blow off one bank for another one, your mortgage insurance ends and you'll have to arrange new coverage. If you're a few years old or in poorer health, your premiums could jump.
If you had a 10- or 20-year term policy, on the other hand, you have the freedom to manage your mortgage however you want without implications on your insurance coverage. Your term policy premiums will rise if and when you have to renew, but generally you'll know in advance what your future premiums would be. As you have the option of lowering the amount of term coverage you buy at renewal time to reflect your lower mortgage balance.
The toughest comparison to make between bank-sold mortgage and insurance and term coverage is cost. Truth is, there are instances when either may be the cheapest.
The reason for this has to do with the different ways in which banks and insurance companies qualify you for life coverage.
When a lender offers you mortgage insurance, usually you'll be asked a few general questions about your health. Most likely, you won't even be asked whether or not you're a smoker.
A life insurer selling term coverage will be more thorough, possibly even requiring a blood test. Most definitely, you'll be asked if you smoke.
The upshot of this way of doing things is that life insurers can offer you a premium more closely tied to the level of risk you offer, while bank mortgage insurance tends to use a sort of one-size-fits all premium.
If you're in top shape, then you might be able to get a better deal from a life insurer. If you're a mess, then the bank's policy might save you money.
Aside from the strict dollar cost of coverage, there's a value-for-money issue as well.
If you keep rolling over your mortgage with the same bank over 25 years, the premiums on the insurance sold by the lender would remain steady for the life of the mortgage. At the same time, though, the amount you owe the bank is shrinking as you make your payments.
In other words, you're paying a level amount for a shrinking level of coverage. Bank insurers say the declining loan balance is factored in when the premiums for your coverage are set, but you'll still end up paying for virtually no coverage as you approach the end of your mortgage.
These days, a few lenders are pitching disability or critical illness insurance to mortgage customers as well as life insurance. In a future column, these will be compared with the coverage you can get through a life insurance company.
For now, though, it's safe to say that bank-sold insurance is better than no insurance at all, but you're far better off to check the alternatives. ‹ Back to Main Press Page