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Mortgage Insurance – Understanding the Pitfalls

Mortgage Insurance

A recent meeting with a widowed lady reminded me that mortgage life insurance offered by banks is a big gamble. When her husband passed away, I delivered cheques from two life insurance policies within 45 days. Not so on the coverage they thought they had on an operating line of credit with a bank and a land loan with another lender. One refunded the premiums but denied the death claim and the other lender paid out nothing. She then had to go-cap-in hand to the first lender for a new operating line to put the crop in. She was pressured to purchase their mortgage life insurance at over $300 a month, even though she already had plenty of coverage. She could have assigned to them but they refused to accept this.

If you are pressured by a lender to buy life, disability or critical illness coverage as a condition of getting a loan, understand that it cannot be used as part of the qualifying for a loan. “Tied selling” is strictly forbidden under the Bank Act.

The idea of mortgage insurance sounds good; if you or your spouse dies the insurance pays off your mortgage. Unfortunately it doesn’t always work that way. When your lender sells you mortgage insurance, they ask some basic medical questions, they collect premiums every month from you and they get coverage that they are beneficiary of.

Mortgage insurance is unlike individual life insurance. Individual life insurance policies are only issued after being medically qualified by underwriting. Not so with mortgage insurance. Even though you answered some medical questions and the bank collects the premium, the policy not is actually “underwritten” until there’s a death.

Potential for Mistakes: Most individual life insurance companies have trained personnel whose only job is to perform medical interviews, which can take up to and hour. On the other hand, bank employees have little training about medical conditions or medications, so borrowers are on their own to answer as well as they can. If there’s an error or omission, insurers may turn down a claim and you may receive little or no compensation no matter how long you paid premiums. It all hinges on whether the claimant passes a post-death medical exam. Even slight health problems or common medications that have nothing to do with the claim are sometimes used as a reason to deny the claim. Some lenders may refund premiums, but they may also charge a penalty for breaking the mortgage if the homeowner has to sell due to financial hardship which many survivors face.

Mortgage life insurance is not transferable, so if you move or sell, your premiums go up in a puff of smoke. If your health changes you may find yourself with higher premiums or without coverage. Not only that, some coverage declines over time even though your premiums do not. Some limit claim payments until after a specified time period, just when you need the money the most.

Don’t play Russian roulette with your life insurance coverage. Personally I never take coverage offered by lenders as I want to own and control my coverage. Many people buy mortgage insurance for peace of mind, but there are better ways. Contact a trusted local life insurance advisor for a quote on personally owned life insurance coverage for your mortgage. It will probably be cheaper, easier and offer more future flexibility.

 

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