I write these articles because I get sick to my stomach every time I see the media or a company mislead the public on a personal finance issue. The latest was an advertising supplement in the middle of the Globe and Mail business section. It was entitled “Mortgage insurance among ‘must-haves’ for first-time homebuyers” and written to look like a newspaper article and did not have an author’s name on it. For good reason, it made the claim that mortgage insurance was a must-have so buy it through your lender! Interestingly enough the article was produced by Genworth Financial Group who sell mortgages and yes you guessed it MORTGAGE INSURANCE.
I agree that people should put proper protection in place for their loved ones but not for their mortgage provider. I believe that you are far better off applying for your own life insurance protection through an independent insurance broker. To understand the reasons why see the article below.
Bank Mortgage Life Insurance: Who Is Protecting Whom?
Buying a house involves more than just looking through listings and visiting open houses. Somewhere along the way, purchasers must apply for a mortgage. I recently met with John* and Susan*, a married couple with two children, ages 3 and 1. They purchased a home, met with a mortgage representative from one of the Big Five Banks and received a $300,000 mortgage. They also opted for the bank’s mortgage insurance.
They told me that they answered no to the health questions and checked the box that read “we would like our insurance to start as soon as our application is approved”. They did this without as much as an afterthought. To them, having insurance meant that if one of them were to die, money would be paid out for the other’s use.
I explained to them that mortgage insurance may be cancelled by the bank if they move to another financial institution, if the mortgage is in default or paid off; and it may not be guaranteed at the mortgage renewal date. They admitted they were not informed of this. I continued to tell them that the bank covers only the value of the mortgage upon death. For instance, in three years time, if the mortgage is paid down to $220,000, upon death, the bank will only cover the decreased balance: $220,000. Meanwhile, the premium amount stays the same; it does not decrease in conjunction with the mortgage.
I told them to pretend that John chose to solely use the bank’s insurance and that three years from now, on his way home from work, he passes away from a sudden heart attack. Devastated and alone with two young children, Susan would contact the bank about the insurance, thinking that it would provide financial protection to her and the kids.
John looked uneasy and admitted that his dad passed away from a heart attack a few years ago. As well, John was diagnosed at the age of 9 with a heart murmur and answered NO to the question “have you ever had or been treated for heart disorder?” simply because he forgot.
I explained to John that the bank performs “Post Claim Underwriting”, meaning medical issues are explored upon claims (i.e. after a person dies). If John did die, his medical records would be obtained and a claim could potentially be denied because he had failed to disclose the heart murmur. This would result in Susan and her family not receiving any money from the bank, thus causing serious financial hardships for the family.
When insurance is applied for using a licensed Insurance Advisor/Broker, all due diligence is performed up front; thorough medical questions are asked and if required, a nurse visits your home or office to perform a physical.
The bank’s insurance product did not do what John and Susan thought they had hired it to do: financially protect the surviving spouse and family. Instead, it only protected the mortgage. Granted, the paid off mortgage is one less expense that Susan would have to worry about but with her not working, the family’s financial future could be in serious jeopardy.
With John’s income lost forever, Susan would have to find a job to pay for childcare, household expenses, daily bills, groceries, car payments, future education, outstanding debts, taxes as well as final expenses for John.
My clients are always advised to look at the bigger picture: insurance should protect more than just the mortgage on a home. When looking for a house, apply for insurance outside of the bank right away – you can lock into a rate at a younger age and continue to fund the policy without having to worry about “what if?” Not to mention, the policy is owned by you…it can follow you if lenders are changed.
Furthermore, structuring a proper insurance plan will allow you to pay a level premium for a set amount of coverage. If monthly premiums are $70 per month for $300,000 of insurance, this is the amount the beneficiary of your choosing will receive, not the bank.
In addition to dealing with a realtor, a mortgage representative, a home inspector, a moving company and all the other types of businesses that are needed prior to moving into a home, always include a licensed Insurance Advisor/Broker on that list. In fact, a number of my clients are mortgage brokers and mortgage representatives with the banks.
When the mortgage agent at the bank tells you it’s a good idea to buy the bank’s mortgage insurance and asks you to check the box reading “I/we would like our insurance to start: as soon as my/our application is approved”, check the “initial to waive Life Insurance” box instead. If the Bank or Mortgage broker asks why, you’ll already know the answer.
*Names in this article have been changed.