If you own your home, chances are you were offered mortgage life insurance from your bank. This type of insurance is sold by the banks as a flexible, low-cost way to protect one of your largest financial obligations.
If you die, get a terminal illness, or suffer an accident, your mortgage life insurance can pay the following benefits:
- Your entire outstanding mortgage principal amount, up to $500,000
- Up to five years of accrued interest, and
- Any debit balance in your tax account
The concept behind mortgage life insurance is a good one. It makes sense to protect your family against an unexpected illness, accident, or death.
However, I declined the banks’ insurance coverage when we purchased our new home. Instead, I keep enough term life insurance to protect my family. Here’s why you should avoid mortgage life insurance:
You’re Not Always Covered
Mortgage life insurance is meant to reassure you that your family will be able to stay in your home should anything happen to you. Unfortunately that’s not always the case when mortgage life insurance is sold through the banks.
This CBC Marketplace investigation looks at two families who bought mortgage life insurance coverage and thought they were protected, only to have their claims denied when they became sick or died. In each case, the insurer said the applicant had lied on their initial application form.
It turns out that even a routine test at the doctor could be reason to deny your claim, if you don’t mention it up front.
According to the report, the bank representatives selling mortgage life insurance are unlicensed and rarely trained to explain the details and legalities of these insurance products. People are paying premiums and think they are covered, only to realize later that they are not.
Mortgage life insurance is the one financial product that goes down in value as you continue to pay, yet the banks promote this as a benefit to you, stating – your premiums will not increase for the term of your mortgage, even as you get older. It’s comforting to know that this important coverage will remain affordable.
The monthly mortgage life insurance premiums for a 30-something couple with a $300,000 mortgage can range from $75 – $120. After four years of payments, your outstanding mortgage balance will be reduced to $270,000, yet you will continue to pay the same mortgage life insurance premiums. That’s called a declining benefit.
Related: Understanding Life Insurance
On the other hand, a $600,000 5-year term life insurance policy only costs about $50 per month for a 30-something non-smoker. You get twice the coverage with term life insurance for half the price of mortgage life insurance.
The other advantage of taking out term life insurance instead of mortgage life insurance is that term life protects more than just your mortgage. The mortgage is just one expense your family will face if you die. Other family needs can include funeral expenses, your children’s education, and income replacement.
Term life insurance gives your surviving spouse or beneficiary the option of paying off the mortgage or using the payout for other purposes. With mortgage life insurance, the bank is the beneficiary and only the mortgage will be paid off.
Buying mortgage life insurance is not a requirement to qualify for a mortgage. It’s an easy sell for lenders who suggest it at a time when you’re vulnerable and haven’t shopped around, similar to a retailer trying to get you to buy an extended warranty. Then they make you sign a waiver form if you decline the coverage.
The reality is that buying mortgage life insurance from your bank is generally a bad idea. Term life insurance is much cheaper and offers greater protection than the mortgage life insurance offered by your bank.