When you signed for your mortgage, you were offered mortgage life insurance for mere pennies a day. If you chose to decline it, you had to sign all sorts of liability forms declining said insurance, which no doubt made you second-guess your decision, and possibly change it.
There are several reasons why declining the bank-offered insurance is advisable in favor of an individual life insurance policy:
Mortgage Life Insurance Insures the Bank, not You
Okay, so your life is in the lurch, but your family doesn’t actually see any of the life insurance proceeds should you die. The bank is the beneficiary of the policy. So the good news is that your estate is absolved of its mortgage liability when you die. But the bank is truly the winner here – they get their money. And for this, you get to pay the monthly premiums.
Individual Policy: If you had higher interest credit card debt for example, your family could choose to pay that off instead and carry the mortgage. Choices abound with an individual policy.
Mortgage Life Insurance is a Decreasing Benefit with Level Premiums
Mortgage life insurance pays off the balance of your mortgage. And if you are paying it off responsibly, that amount will decrease as the years go by. However your premiums remain the same. Some would argue that this is accounted for in calculating the premiums, however I have sifted through many quotes and illustrations, and not found this to be the case.
Individual Policy: Standard term life insurance will offer a level benefit for the term. You pay “x” dollars a month, and if you die your beneficiaries will receive “x” dollars. Period.
Changing Mortgage Lenders Means New Underwriting
At the end of your five year term (for example), you decide to switch your mortgage to another bank offering better rates. However if you want the life insurance option, you will have to succumb to the medical questionnaire and underwriting process again. If something has happened to affect your insurability during this time, you could well be declined.
Individual Policy: Most term life insurance has a renewability clause. Under the terms, you have the option of renewing the insurance at the end of the specified term (eg: 10 years), but at significantly higher rates. The premise of this is that you are guaranteed to be insurable (until age 65 or 75 for example), but will pay increasing rates at each renewal. If instead you reapplied at the end of the term for a new policy and are healthy, you would get much lower rates. But if something had indeed happened to you to affect your insurability, with the renewable clause at least you still have some coverage.
You may say “oh, but xyz well-known insurance company is offering the insurance through the bank – it’s not just bank insurance, it’s an individual policy. I get paperwork and everything”.
Although ‘xyz insurance’ is underwriting the policy, and although you know they offer individual policies , if you sign for it through the bank it is still mortgage life insurance. The issue here is not the insurance company; it’s the product. Don’t be fooled into thinking that your mortgage life insurance policy is a suitable substitute for your own individual life insurance policy. Do a proper needs analysis (preferably with your financial planner), and cover off the exact amount of life insurance you truly require.
