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There is a financial path that many Canadians go down.
The path we are talking about is mortgage linsurance. Sadly many people
don’t even know if they have it, but many of you do.
Our advice: DO NOT DO IT!!
When getting a mortgage, you are often told by your banker or mortgage
broker, “In order to protect your family from the debt on your house,
you should get mortgage life insurance. It’s just an easy signature.”
To be fair, offering this product may be the only option these
professionals have. But like many of our columns suggest, just because it
is the seller’s only option, doesn’t mean that it should be your only
option.
This is usually one of the easier sales out there for bankers and
brokers. But as a consumer, you should be aware that you are primarily
protecting the lender.
How is that?
Well, if you pass away, the beneficiary on this type of insurance is the
lender, not your chosen beneficiaries.
Why is this important?
If you have a family and you pass away prematurely, they may need the
financial flexibility to cover off many needs. If you are the owner of a
life insurance policy, your family will receive a lump sum payment that
can be used for any purpose. With mortgage life insurance, the good
news is that you will no longer have a mortgage to pay. The bad news is
that there is no money to cover anything else. Your mortgage expense
disappears, but what about the money that goes out the door for property
taxes, utilities, food, clothing, transportation and other expenses?
Here are five other key reasons why it is better to get an independent
insurance review than to sign up for mortgage insurance:
1. You need to ensure proper coverage. Your insurance needs are
not based solely on the size of your mortgage. Protecting against lost
income is by far a bigger need.
2. Personal life insurance pays out a fixed amount. Mortgage life
insurance pays out a declining amount that is linked to your mortgage
balance – even though your payments stay the same.
3. Cost. Mortgage life insurance can be more expensive because
you are not shopping for the best price. You are simply signing up for
the insurance tied to your mortgage.
4. Lack of guaranteed continuity. Mortgage life insurance may be
cancelled by the lender if you change lenders, if the mortgage is in
default or paid off; and it may not be guaranteed at the mortgage
renewal date.
5. Lack of guaranteed payout. This could be the most important
issue. Because mortgage life insurance is usually offered based on a
questionnaire and not a medical, there is a good chance of “post claim
underwriting.” This means that medical issues are explored upon claims
(i.e. after a person dies). If you pass away, your medical records would
be obtained and a claim could potentially be denied because of
something not disclosed properly on the questionnaire. In contrast, when
insurance is applied for using a licensed insurance adviser or 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.
There is, of course, a benefit to getting mortgage life insurance. It is
easy. Easy is definitely worth something. Easy also usually carries a price.
But when it comes to protecting your family properly, you don’t want to
be remembered for taking the easy route.
If you currently have mortgage life insurance, don’t suddenly cancel it.
Simply sit down with an independent insurance adviser and ask them to
find you a better alternative. Ask all the key questions, and when you
are comfortable, move forward knowing that now you are protected,
not your lender.
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