The Hidden Pitfalls of Bank Mortgage Insurance or “The Devil Really Is In the Details”

Before starting my own legal and fee-for-service financial planning practice, I worked for a major Canadian insurance company for about 9 years and learned more about life insurance than I thought was humanly possible.  Although I will spare you from most of the details, I do want to let you know about one biggest potential problems I see: people purchasing mortgage life insurance from the lending bank or credit union.
If this sounds like you, I highly encourage you to wade through the rest of this article and to consider replacing this coverage with personally owned life insurance coverage.  If you do, it could save your family some money over the life of your mortgage and may also save them a lot more money and aggravation if they need to collect on the policy.

To begin, let me make it clear that you DO NOT have to purchase mortgage insurance from your financial institution  in order to get your mortgage approved.  In fact, it is illegal for them to require this.  Second, if you already have this coverage and, after reading this article, feel a burning urge to buy a personally owned policy, DO NOT cancel your bank coverage until your new policy is in place.  Although bank mortgage insurance has its long list of drawbacks, which I shall list shortly, it is usually a lot better than nothing.  Third, I don’t sell life insurance, although I know a bunch of people who do.  Accordingly, I am happy to pass along some names, none of whom will pay me any sort of commission if you do purchase from them.

In any event, as we now live in an age of bullet points, here is a list of reasons why personally-owned coverage is usually the better way to go:

• The coverage amount doesn’t decline with each mortgage payment.  Personal insurance lets you pick a set amount of coverage that does not reduce along the way.  On the other hand, as mortgage insurance only covers the amount still owing at death, your coverage decreases with each payment.  You might think that your mortgage insurance premiums would also decline along the way as well, but you would be wrong;

• Premiums might be cheaper.  Bank mortgage insurance doesn’t do a detailed analysis of your health when you apply, so if you consider yourself a prime physical specimen, you may be able to get lower rates than the banks offer.  Even if you are not in peak form, the rates are often pretty comparable.   As well, you can always reduce your personal coverage along the way as your mortgage gets smaller.  Unlike bank mortgage insurance premiums which stay the same as your mortgage and death benefit declines, if you reduce personal insurance coverage, your payments will also reduce.  There are also some other strategies that can reduce premiums over the life of your mortgage;

• You decide the length of coverage and only have to be healthy once.  If you go with the bank mortgage insurance, your coverage will last only as long as you stay with that institution.  As a result, if you want to change lenders mid-mortgage, you could find yourself uninsurable.  If you get a personal policy, you can get a policy for the expected life of your mortgage or longer without having to worry about your cholesterol levels every time your mortgage comes due.

• You can thwart estate creditors, minimize probate fees and reduce the amount up for grabs if your Will is Challenged.  Personal coverage allows you to leave the death benefit outside of your estate, which can guarantee that your family gets the proceeds if done correctly.  On the other hand, mortgage insurance effectively gets paid into your estate if there is no surviving joint owner of the home, which can mean exposing the insurance proceeds to all the issues just mentioned.

• Your beneficiaries can decide how to spend the insurance money.  The interest rate on your mortgage is usually one of the lowest interest rates you have.  If you leave behind a surviving spouse or if your family will keep the home, they might be better off paying down loans with lower interest rates first or they may need the money for other living expenses rather than paying down the mortgage.  If they are going to sell the home anyway, it is probably a lot handier to have the insurance proceeds in cash now rather than having to wait until the house gets sold before they get it.

• You have likely answered most of the tough insurance questions before you die.   Insurance companies review your medical situation and other factors determining whether you qualify for coverage when you apply.  Bank mortgage insurance involves a very simple form that is easy to fill out incorrectly and they do not look into your situation unless you die before the mortgage does.  As a result, it is more likely that your mortgage insurance coverage will be denied than your personal coverage.  In my view, it is better to find out about problems now so you can hopefully still convince the insurance company to offer protection (even if at higher rates) than it is to pay mortgage insurance premiums for years only for your claim to be denied when your family is in need.

Anyway, if you are at all worried about your bank mortgage life insurance after delving through this article, I suggest that it is at least worth the time to compare private insurance rates against what you are currently paying.   Although I don’t know of anyone who has actually enjoys the questions, forms and medical tests that may go along with applying for life insurance, your family is probably, most of the time, worth it.