Please see below on why you should consider owning an independent life insurance policy (or term life) vs mortgage insurance (creditor insurance) sold from the bank:
- Post-Underwriting - Bank insurance is post underwritten. Companies investigate the eligibility AFTER a claim has been made; i.e. you may be paying premiums for years and in the event of a tragedy your loved ones may discover you never qualified for the insurance in the first place.
- Cost - Often, mortgage life insurance with less features and flexibility actually costs MORE than an independently owned insurance policy.
- Portability - If you buy the coverage from your lender, it may disappear if you refinance, however in the case of a new lender it will require a new policy based on attained age at that time. Just as you want to avoid depending on your employer's life insurance coverage, in case you change jobs, you should also make sure your insurance isn't going to vanish just because you found a better mortgage.
- Named beneficiary - The proceeds if something were to happen will bypass your loved ones. Mortgage insurance plans purchased through the bank automatically pay off your loan no matter what situation your family faces at your death. An individual life insurance policy lets you name your spouse or children as beneficiaries, giving them flexibility to pay off the mortgage when they feel the time is right.
- Declining benefit - As mentioned above the bank's creditor policy is a declining benefit i.e. the benefits may vanish before your eyes. Mortgage insurance benefits gradually decline in an attempt to match the declining balance of your debt (declining benefit). Those plans are like a runaway train, you may move into a bigger house with a bigger mortgage, but the death benefit keeps shrinking anyway. Buying an individual life insurance policy keeps you in the driver's seat, letting you lower the benefits as you see fit or keeping a level benefit for life.
- Convertibility - An individually owned term insurance policy in most cases will allow the policy to be converted without medical to a permanent (life long) solution. A creditor insurance policy owned through the bank does not provide this benefit, which is especially important if one gets sick and can no longer qualify for coverage.
- Preferred underwriting - an independently pre-underwriten policy allows the insurer to determine if you qualify for "preferred" rates which will lower premiums even further
- Consolidation of benefits - by combining your mortgage insurance, with other insurance needs such as income replacement, child care, education etc you will benefit from fees saved on multiple policies and tiered discounts (typically insurance companies discount in 250K bands of insurance), along with simplicity of understanding how much coverage you have in one place. With a bank you can only insure your mortgage.
- Discussed with a licensed insurance professional - Most bank staff selling creditor mortgage insurance are unqualified and unlicensed in life insurance. Licensed professionals shop the market.
- Shop the market - buying an independent life insurance policy from a licensed broker allows the market to be shopped to find the best possible solution from a wide range of insurers. Banks often work with only 1 insurance company to provide a singular solution. Furthermore, licensed professional have a responsbility to sell based on a Needs Based approach and can accurately assess your needs.
Lastly, while looking at life insurance, make sure to consider disability and critical illness insurance in case you become unable to pay your mortgage due to serious illness or injury.
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