Mortgage insurance is one of the most important decisions when buying a new home, but unfortunately, many people do not consider it carefully. Many mortgage representatives at the big banks will always tell you to get mortgage insurance. Stressed, vulnerable and without having shopped around for insurance, many new homeowners say “yes” without a second thought. After all, insurance is meant to protect you, right?
What exactly is mortgage insurance?
The bank’s mortgage insurance is also known as Creditor Protection. What this means is that the beneficiary of the insurance policy is the bank. In the event of death, the bank is repaid the mortgage loan but surviving family members receive no funds from the insurance (except for a mortgage-free home). Depending on your mortgage and personal situations, it may not be in your best interests to pay off your entire mortgage. Concerns about property taxes and income may force your family to sell the house.
Important Facts about Mortgage Insurance
- Bank mortgage insurance is usually more expensive than the same product through an independent insurance advisor.
- It may be cancelled at the bank’s discretion if you move to another financial institution, default on or pay off your mortgage. The insurance is also not guaranteed at your mortgage renewal
- The insurance only covers the value of your mortgage. For example, if you pay off your $400,000 mortgage to $250,000, upon death, you will only receive $250,000. However, the premium stays the same and does not decrease in conjunction.
- The banks perform “Post Claim Underwriting” meaning medical issues are explored on claim (i.e. after a person dies), leading to a higher chance of a claim being denied
What is a better alternative?
The right type of life insurance product can ensure that your beneficiaries have enough funds to take care of your mortgage, property taxes and other financial needs as they arise, as well as the flexibility to use the funds as necessary. When in the market for a house, apply for insurance outside of the bank right away (and waive the bank’s mortgage insurance) to protect your home and family. In addition to dealing with realtors, mortgage representatives and a home inspector, when buying a new home, include a licensed Insurance Advisor who can help you with this.
If you liked this article, learn more about different insurance products: The Difference Between Critical Illness and Disability Insurance.