Avoid Mortgage Life Insurance from Banks

Avoid Mortgage Life Insurance from Banks

Canadians typically get mortgages through their bank or a mortgage broker. During this process, it is very common for “mortgage life insurance” to be added to the mortgage. The bank will charge an additional monthly premium which is added to your mortgage payment with the promise of paying off the mortgage balance in the event of death. They will sometimes also offer illness and disability protection, but we will be focusing on life insurance in this article. This coverage that is offered from the bank can seem mandatory at the time of setting up your mortgage, but in fact it is not mandatory. People who are aware of the disadvantages of having coverage from their bank will cancel it and replace it with what is called a term life insurance policy.

The majority of people who are paying their bank a monthly premium for “mortgage life insurance” are unaware of how this coverage from the bank actually works. Some of the main points of discussion are,

1. The coverage is not guaranteed. This means that in the event of death, the bank is not guaranteed to pay off the remaining balance of your mortgage. This is because of something called post-claim underwriting. When you initially setup your mortgage and complete the application for mortgage life insurance, you are only answering a few subtle questions. Post-claim underwriting means that the bank will underwrite your policy at the time that a claim is made. In other words, they will determine if they would have offered you the coverage when you first applied for it at the time you make a claim. This results in the bank looking for any reason or cause for them to not have to pay out your mortgage balance.

2. The beneficiary is the bank. If you make a claim and the bank does in fact approve your claim and agree to pay out the mortgage, they will pay out the balance of the mortgage. You do not physically receive any funds from the bank. At the time of death, it is very important to have funds readily available to be able to cover unforeseen bills, costs, etc. With coverage from the bank you will not physically receive any money in your hands.

3. Your coverage amount decreases every month while your premium stays the same. The bank is only covering the balance of the mortgage, but will not make changes to your monthly premium. As a result you are paying the same monthly premium while they reduce the amount you are covered for every month.

4. Premium costs for mortgage life insurance change whenever you make changes to your mortgage. The most common type of mortgage is a 5 year term fixed mortgage in Canada. If you have mortgage life insurance, you can expect changes to your mortgage life insurance premiums every time you make changes to your mortgage which is typically every 5 years.

5. The cost for coverage from the bank is expensive. You typically are over paying for life insurance coverage from your bank when compared to alternative options (e.g. term life insurance which we offer).

These are a few of the main disadvantages of having life insurance coverage on your mortgage from your bank. As mentioned above, you should replace your coverage at the bank with a term life insurance policy from a Canadian life insurance provider as there are many different benefits in doing so.

1. A term life insurance policy is guaranteed to pay out in the event of a claim. You must go through an application process before being approved for a term life insurance policy. Once the policy has been approved it is guaranteed to pay out, unlike the coverage from a bank.

2. You can choose the beneficiary of the policy. Unlike the coverage from a bank, with a term life insurance policy you can choose who receives the cash payout of a term life insurance policy. For example, if the coverage amount you chose with a term life insurance policy was $750,000- the beneficiary would receive $750,000 tax free as a lump sum payout in the event of a claim. This money can then be used however the beneficiary wishes which includes paying off the mortgage completely, paying off a portion of the mortgage, pay off other debts, use the money to live off, etc.

3. The monthly premium and coverage amount do not change- they are both guaranteed. With a term life insurance policy the monthly premium and coverage amount of the policy are both fixed for a period of time (typically 10, 20 or 30 years). For example, a 20 year term life insurance policy for $750,000 will mean that the coverage amount of $750,000 will not decrease for 20 years and the monthly premium will always be the same for the 20 year period. Also- keep in mind that you are not tied to a term life insurance policy for that period of time. If you have a 20 year term life insurance policy, you can cancel or make changes to it at any time with no fees or costs.

4. The premiums are typically lower when compared to policy premiums offered by the bank. This means that you can get a better policy with more benefits at a lower monthly cost.
There are more reasons as to why a term life insurance policy makes more sense compared to coverage offered by your bank. Please contact us with any questions or if you would like personalized quotes to consider. We offer all major life insurance carriers in Canada and can guaranteed to provide you a policy that fits for you and your family at the lowest possible cost.

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