Buying a home is one of, if not the largest investments you will make. It makes sense that you want to protect your mortgage with with life insurance but what is the right type?
Most Canadians are never given the proper information about their protection options. Bankers and lenders, just as you are about to sign documents, make you feel that getting the insurance they offer, creditor insurance, is mandatory and it’s not!
Banks’ “hyper-aggressive” selling of creditor insurance for mortgages is a bad deal for Canadians, according to Rob Carrick — a personal financial columnist from the Globe and Mail. The problem is that you are being offered a “junk product” and not being told about a significantly cheaper and better option.
Banks can make creditor insurance sound like a “traditional” life insurance policy, but that’s not the case. It is one thing for banks to nickel and dime Canadians on credit card or banking fees, but our home is where our kids live, and it’s where our life happens.
A personal 10-year term life insurance is a stronger and likely cheaper option for Canadians to insure their mortgages.
Here are 5 reasons why you should choose a personal policy:
1. The lender gets the money
With creditor insurance at the bank, they get the money, not your family.
A personal life insurance policy gives the money to your beneficiary, they get to decide what the best financial option for your family is. Maybe that decision is to take some time off, pay bills, pay off a portion or all of the mortgage, or maybe make a life change.
Your family deserves to be in control of the money, not the bank.
It’s also important to note that some banks’ creditor insurance does not even protect 100% of the outstanding mortgage. Here are examples of some of the limits banks have on their coverage: Initial mortgage over $500,000 (TD, Scotia), $600,000 (BMO) or $750,000 (RBC, CIBC).
2. They overcharge! (surprise, surprise)
In many cases, a personal 10-year term plan is up to 50% cheaper than coverage at the bank and for women, it can be up to 70% less!
The advice from Rob Carrick is:
“…Just buy it (term insurance) from an insurance company with competitive rates on term life policies. The coverage will most likely be cheaper than a bank-sold policy…”.
Preferred or discounted rates with a personal plan are another way you might be able to save money, something that is not available with creditor insurance.
Creditor insurance premiums typically increase every time you re-apply for your mortgage — often that means every 5 years — but with a personally owned 10-year term policy, premiums are guaranteed for 10 years, saving you money.
Of course, the pricing of term life insurance is based on gender, smoking status, health and a number of other factors.
3. They ask the important questions AFTER you’re dead
It is only after you die that the creditor insurance really looks into the validity of your coverage.
Applications for a personal life insurance policy require full underwriting up front, at the right time, giving you comfort that you actually have coverage and that your mortgage is properly protected.
4. The evils of declining coverage
You should get what you pay for, but that’s not the case with creditor insurance at the bank. Bank mortgage insurance is designed as “declining coverage” and it is simply not right. Here’s how it works:
You apply for a mortgage of $500,000.
You pay premiums to the bank based on a $500,000 mortgage.
Hypothetically, you die 4 years later, and your mortgage at that time is $425,000. What amount does the bank coverage payout?
Answer: $425,000. Only the outstanding mortgage was paid out, even though you have been paying premiums based on $500,000 of coverage. Where did the other $75,000 of coverage go? You were paying for it, so it’s a good question to ask your lender.
In this example, if you had purchased personal life insurance for $500,000, the beneficiaries would receive $500,000, which is what you would expect given that that is what you were paying for!
5. Can’t take the coverage with you
Bank or creditor insurance is owned by the lender and is tied directly to the mortgage so coverage is not transferable between properties.
You own and control a personal life insurance policy, not so with mortgage insurance at the bank.
For example, If you bought a condo and now want to move into a house or to a new city, the mortgage coverage at the bank does not transfer to the new property. This means you have to reapply for mortgage insurance and being approved is not guaranteed.
With personal life insurance, your coverage is not tied to the property, so you don’t have to worry about your family being without protection.
With the bank, every time your mortgage renews (i.e. 5-year term) or you buy a new home, you have to reapply for creditor insurance because you don’t own the policy. This means that when it is time to shop the market for a new mortgage, you may not qualify for the new life insurance based on health or other lifestyle changes.
With a personal life insurance policy, you don’t have to worry about that; because you own the policy, coverage belongs to you! It goes where you go and any changes to your health will not affect your coverage or even the amount you pay! This guarantees that you will always have life insurance coverage regardless of changes in your health, buying a new home, or a decision to move to another city.
How to cancel coverage at the bank?
If you already have creditor insurance for your mortgage at the bank, but you want to change to a personal life insurance plan — you can!
Here are the steps to take in getting a personal life insurance policy to cover your mortgage:
- Apply for a personal life insurance policy
- Receive your new approved personal policy
- Contact the bank and ask them to cancel your mortgage life insurance.*
*Make sure to only cancel your creditor insurance with the bank once you have your new policy, you want continuous coverage. There are no costs associated with cancelling creditor insurance.
Don’t get ripped off
Buying a home is a big investment and it is one where prudent management can pay off. Getting the right type of life insurance is just one way to be financially prudent.
Get a 10-year term insurance policy as it saves you money, is flexible, provides options and puts the control in the hands you are wanting to protect. Banks nickel and dime us enough, don’t let them do that to your largest investment, you deserve better.