It is very easy to get caught up in the decision to add mortgage insurance when signing for your mortgage. It is an emotional time, and you want to be protected. A couple quick questions, and APPROVED…, but are you really? What are your options?
Private life insurance is the other option, and, in my opinion, a smarter option. Let me explain…
There are a few glaring differences that should be understood when differentiating between mortgage life insurance and private life insurance.
Mortgage insurance is protection for the lender. If a claim is paid, the money goes directly to the lender, to cover that outstanding balance. This means, while you continue to pay down your balance, your coverage is also decreasing at the same time. The problem: your cost will remain the same or potentially increase over time.
With private life insurance, the protection is for your family. Every private life insurance policy provides a tax-free death benefit to the beneficiary. They may then use the money for any purpose: mortgage, education, income supplementation, etc.
Underwriting is the process an insurance company goes through to determine risk. This will typically influence the pricing and determine if they are willing to assume that risk.
With mortgage insurance, this process is done at the time of claim. Therefore, when the coverage is needed the most, the carrier will then start to dig into the answers on your application and your medical history to determine if you qualify for the coverage. Unfortunately, there have been many situations in the past where someone answered a question incorrectly or did not mention a past medical test and their claim was denied.
Fortunately, those who decided to go with private coverage don’t have to worry about this, as the underwriting is done up front and the risk is assessed before coverage is provided. This means that once your coverage is put in place, you can have peace of mind that the benefit will be there when it is needed most.
As mentioned above, mortgage life insurance will cover your outstanding balance at the time of claim, even if your balance is half of the original amount. In addition, some mortgage insurance providers work on a banded system, which in effect, groups you in with every other male or female in the same age band. Typically, in 5-year increments, your pricing will change when you enter a new age band.
Private insurance on the other hand, is specifically priced for you. There are no price changes for your desired term and the price is based on your qualified health status. In most situations, the private coverage is less expensive compared to the mortgage coverage.
The fine print: There have been several cases that I have seen in the past where an individual thought that they were covered for their entire mortgage, until we looked through the fine print and noticed the maximum limit of the mortgage insurance. The upper limits are about $1M, but I have seen them as low as $500,000.
All in all, the flexibility and strength of private life insurance will provide you with the peace of mind that if the coverage is needed, it will be there.
Finally, there are several different opportunities that private coverage provides that is not available with mortgage coverage. One of the best examples is layered coverage. Let’s say you have a $1M mortgage. Traditional recommendations would be to cover $1M for 20 – 25 years. But in 10 years time, your mortgage is not going to be $1M and you may end up over-insured. If you have gone through a proper needs analysis to determine what you would like to have insured, a layered option allows you to drop coverage and cost along the way to mirror your needs throughout time.
