Mortgage Life Insurance – the REAL reasons you don’t want it.

Comparisons between term life insurance and mortgage life insurance are common.  But few if any will show you the real worst case scenarios that show mortgage life insurance to be a huge mistake.

Here are the common reasons to buy term life insurance that you’ll read about on the internet:

• Mortgage insurance is decreasing insurance.  Your premiums remain level but the amount of insurance declines with your mortgage.
• The insurance company pays the bank, not your beneficiary.
• Mortgage life insurance uses post-claim underwriting and may lead to your claim being denied.

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And these are all true (except the last one, which requires clarification, see below).  And term insurance compares well against these drawbacks.  However there are a few other ‘gotchas’ with mortgage life insurance that aren’t discussed.  These deficiencies can cause huge problems, not the least of which is leaving you without insurance coverage when you want it the most.  Here’s some of the reasons common in many mortgage insurance products:

• You can be denied insurance every time your mortgage renews.  Because your insurance is tied to your mortgage, every time you go in to renew your mortgage, or switch banks, your old insurance is cancelled and you have to requalify for new mortgage life insurance.  If you’ve become unhealthy and uninsurable, you’ll find yourself with no insurance coverage.
• Mortgage insurance does not have a conversion option.  Most term policies allow you to convert from term insurance to permanent life insurance, without taking a medical exam (and still getting healthy rates).  If you become uninsurable/unhealthy with mortgage insurance, you’re goose is probably cooked when your mortgage renews.  With a      term policy, if you become uninsurable you simply use the conversion option to lock in your life insurance rates for the rest of your life, at healthy rates and no medical exam.
• Premiums go up every time you renew your mortgage, likely every 5  years.  (this is speaking generally).  If you have a 5 year term on your mortgage you should expect your premiums to go up in 5 years.  And the premiums at renewal may not be guaranteed – they could be anything.  Compare those premiums for a 5 year period with a 10 year term or 20 year term life insurance premiums and expect to be pleasantly surprised.
• You can’t get preferred rates with mortgage life insurance.  I’ve never spoken to a consumer that received preferred health rates with a mortgage insurance product.  I’m left to assume that they’re not offered.  Term life insurance offers you the opportunity to receive preferred health class premiums (you’re unlikely to receive them, but at least the probability isn’t zero).
• Mortgage insurance may leave your family without enough money.  People buy mortgage life insurance as a proxy for insuring their lifestyle.  They want their family to continue to live as they are now, should a wage earner die.  But does paying off your mortgage accomplish that goal?  If you run the numbers, the answer is ‘probably not’.  That’s because you’re insuring the wrong thing.  Rather than insuring your mortgage you should be insuring your paycheque.  Your family loses your paycheque at your death and it’s your paycheque that’s maintaining your lifestyle, not your mortgage.  By focusing on the mortgage alone, you may leave yourself and your family without enough money to maintain their lifestyle if you should pass.

Post claim underwriting can lead to your claim being denied.  Many articles will suggest that mortgage life insurance has post claim underwriting,where they’ll review your medical history after you die, and then perhaps deny your claim.  By contrast, they suggest that with term life insurance the underwriting is done up front.  This is not necessarily the case – term life insurance policies are frequently carefully reviewed after the insured dies and may lead to a denial of the claim, just like mortgage insurance.  The difference is in the application.  Most people do not read the health declaration they signed with their mortgage life insurance.  They may have understood that they were signing ‘I want the insurance’ and not a specific health declaration (did your mortgage vendor just say “do you want mortgage insurance?  If so, sign here’).  And even if they did read it, they may not have understood the questions, or been able to offer additional information.  By contrast with term life insurance you should be coached by your broker to fully disclose your entire medical history during the application process, no matter how unrelated or miniscule the details are.  This doesn’t mean you won’t get reviewed either way, it does mean you should have minimized the riskof the insurance company finding a detail they can use to deny your claim – simply because you fully disclosed more information and paid attention to details during the application process.

In the end, it’s not just the features of how the insurance works, it’s what can happen in worst case scenarios.  Mortgage life insurance can leave you uninsured with no backup options and caters to the lowest common denominator.  Term life insurance provides longer term coverage and normally has some backup options should you become uninsurable.  And not only does term life insurance normally provide premiums that are level for longer durations (10 or 20 years instead of maybe 5), it does so at rates that are competitive – frequently cheaper – than mortgage life insurance.  You can shop this yourself using the form on the right side of this page.

If you’d like a friendly review of your mortgage life insurance including a comparison of market prices for term life insurance, feel welcome to call us.