Congratulations! You bought a house! It’s a big deal… literally.
Emotions are high.
There are a lot of things being thrown at you and paperwork is flying everywhere.
The home inspection is done.
The movers are booked.
You are drafting the Instagram post for when you get the keys, and then your mortgage broker calls you and says something like,
“You just made one of the biggest purchases of your life and if something happened to you, you need to make sure the mortgage is taken care of so it’s not a burden to your loved ones.”
They are 100% correct. From there they probably email you a piece of paper, go through a quote, and tell you to (likely) check a box. You’re covered. Right?
Not exactly.
If this sounds like something you went through, chances are you have mortgage life insurance. To be frank, this insurance product sucks.
Here’s why.
- It’s not underwritten.
- It’s overpriced.
- It has a declining benefit
Underwhat?
Underwriting is a critical component of any insurance you purchase. Underwriting is when the insurance company investigates your health status and assesses the risk level to the insurance company.
When you apply for insurance with a life insurance professional or financial planner, you will go through the underwriting up front. You will be asked a bunch of medical questions, you may have a nurse come to your home to take your vitals, and then the underwriter will make an assessment based on the information they receive. Once you are approved, you’re good to go for however long you purchased the insurance for. If you are in good health, the risk to the insurance company that you pass away prematurely is low, which (usually) means your insurance costs are low. If you have a couple of health issues, you (may) pay a higher price.
When you apply for mortgage life insurance, it’s not underwritten in advance. Should the bad thing happen, *eh hem* you die, the insurance company underwrites you when you make a claim. Meaning… your loved one just passed away (likely prematurely/ suddenly), you call the insurance company to collect the insurance money to pay your mortgage, and that’s when they investigate the medical history of your loved one who has just passed away. Then they find an issue on their health record, and, sorry grieving widow, you don’t get your insurance. So, you have been paying for insurance the entire time and it was useless to you. This is not the time you want to find out this information.
I want to be clear, that is not to say this type of insurance *never* pays out, but do you want to be dealing with underwriting at the worst possible moment in your life to even find out if it’s going to pay out? Probably not.
Overpriced
Show of virtual hands. If you like paying more for insurance then you have to, raise your hand.
Crickets, right?
With regards to Mortgage Life Insurance, since your merely checked a box and just start paying for the insurance, the insurance company knows nothing about your medical history. You are likely already paying a higher premium, simply because of that… the insurance company knows nothing about you. Higher risk to the insurance company means higher cost, because there’s no underwriting.
If you are in good health, you can likely get life insurance through your life insurance professional or financial planner for a lower cost. As earlier discussed, lower risk to the insurance company means lower cost. Even if you are not in perfect health, it is still worthwhile applying to know what the cost would be. If you are eligible to be covered, at least you know your loved ones do not have to worry about the policy paying out, should you pass away prematurely.
Declining Benefit
Mortgage Life Insurance has a declining benefit. What that means is as you pay off your mortgage, the amount of insurance that pays out is what the balance of your mortgage is (if it pays out).
Life insurance purchased through your life insurance professional or financial planner does not have a declining benefit. Meaning, if you purchase $500,000 in life insurance, and your loved one passes away and you owe $100,000 on your mortgage, you only need to pay out that $100,000 and the rest goes to your surviving loved ones. You could top up your kid’s RESP’s or RDSP’s, or use it how you see fit to support your family.
The bottom line is, you don’t want to know what coverage you have when you need to make a claim. Your mortgage broker was right. Protect your asset and your loved ones with a life insurnace professional that is also a financial advisor.
