My recent article regarding creditor insurance has brought out a lot of interesting questions that I thought that I would take the time to clarify these further.
Beneficiaries – Beneficiaries are the person/persons who receive the financial benefits from a policy. When you have mortgage insurance (creditor insurance), the lender is the beneficiary. This means you have no control of the policy, you just pay the premiums to protect the lender. If there is a death, and you qualify for insurance, your mortgage to the bank will be paid off, but your family receives nothing more. The lender can cancel the policy at their discretion.
When you have personally owned insurance, you own and control the policy. You decide who the beneficiaries will be. You are the only person who can cancel the policy. Your beneficiary can determine how best to use the money that is paid out.
Underwriting – When it comes to life insurance, underwriting determines if you are eligible to take out life insurance. The company looks at a complete medical history to determine if you qualify for insurance or not. If you have just checked a couple boxes answering a couple questions, this is not underwriting. Underwriting will involve past medical reports, often blood work, forms for your doctor, questions regarding your lifestyle, etc. Lenders often do the underwriting at time of claim (death). This means you are not guaranteed you have life insurance until the underwriting is complete. If the insurance is refused, the lender only has to refund the premiums but your family will still be responsible for the debt.
With personally owned insurance the underwriting is done when you apply. You know right up front whether you qualify for insurance or not. Most companies have a 2 year contestability clause to ensure all information given was accurate and after that you have complete peace of mind that you have insurance.
Premiums – Premiums are the amount that your pay monthly for the insurance policy. Lenders base the premium on your age and the amount owing on thedebt. With a lender, your premiums may not always decrease depending on the debt even though the balance of your mortgage continues to decrease. There is no discounts for being a healthier person as underwriting is not done up front.
With personally owned insurance, your premium is based on your health as determined by underwriting and the dollar amount you take the policy for. Your premium remains the same as well as the amount of the policy.
Cancellation – With creditor insurance, the lender owns the policy and it can be cancelled by them for many reasons; a default on your mortgage payment, a change in the lenders insurance company, refinancing or switching lenders. With personally owned insurance, as long as you pay your premiums, you are the only one who can cancel.
Convertible – Converting the insurance you currently have to a longer policy or a different type of policy. With creditor insurance, once your debt is paid, you no longer have insurance. You will be at an older age and would need to re-qualify for insurance.
With personally owned insurance you can convert it to a longer term or a different insurance product at any time. The original underwriting maintains in place.
I fully agree with the concept of mortgage insurance, just not creditor insurance. Creditor insurance leaves families to believe they have life insurance, only to find out too late that they didn’t. To ensure that your family is fully protected, meet with a licensed insurance professional to review what product would be best suited to your needs.