[Ray of Financial Highway is the author of today’s guest post. He is a financial industry insider who has worked as a mutual fund and life insurance sales representative and is currently working towards getting a Certified Financial Planner designation.]
I have pointed out many times that insurance is an important part of your financial plan; it is there to protect you and your family should the unexpected happen. However, many families, unfortunately, have found out that it does not always work that way. The issue here is Mortgage Insurance sold by banks and mortgage brokers. Ellen Roseman recently wrote in The Toronto Star about the experience of the Feldman family, who have been paying premiums for years but their claim was initially denied. The Feldmans did get their claim paid out on “compassionate grounds” after The Star got involved, but many families have not been so lucky.
Working in the insurance industry, I have seen too many families being unaware of the dangers of mortgage insurance. Insurance is a complicated topic and the mortgage professionals who sell these products are usually not trained or licensed to sell life insurance. I strongly recommend that you do your homework and deny any insurance offered by your mortgage lender.
In this post, I will point out some of the differences between the insurance you purchase with your mortgage and one purchased from an insurance company.
Post Claim Underwriting
The biggest issue with insurance from the bank is that they have post claim underwriting, which basically means that the underwriting will be done after a claim has been submitted. Technically you could be declared uninsurable after you have submitted a claim and your claim denied as happened to the Feldmans. If you purchase it directly from your insurance agent, all underwriting will be done before the policy is issued. Therefore you know your claim will be paid out when needed according to the terms of your contract, unless fraud can be proven.
Other issues with Mortgage Insurance
- Beneficiary is the lender. With life insurance, you select the beneficiary.
- Insurance amount decreases with your mortgage, but premiums stay the same. With life insurance, your coverage and premiums remain the same.
- Not transferable to new lender.
- Payout can be used only to pay the mortgage.
- Cannot change policy if situation changes. Policy can be modified as needed.
If you need insurance to protect your family, speak to a qualified insurance advisor to determine the appropriate insurance coverage for your family. Many opt for Mortgage Insurance tempted by the very low premiums but these low premiums come at a huge risk and a few extra dollars saved today could cause your family great pain in the future.
You may also want to check out a story that CBC Marketplace ran on this topic titled In Denial about a year back.