Note: This is a sponsored post written by PolicyMe, but edited by me.
Let’s set things straight: Mortgage life insurance is basically protection for your bank against the risk that you will die and default on your loan. And because of this, there are a few reasons why we’re not a big fan of it. Here they are:
1. Mortgage life insurance is way more expensive.
Lenders don’t make you go through medical underwriting when buying a mortgage life insurance policy. And you know that if you get to avoid peeing in a cup, there’s gotta be a catch.
When your insurance company doesn’t know anything about your medical history, it’s extremely difficult for them to price your policy. They make up for the lack of information by placing mortgage life insurance applicants into the highest-risk groups. In other words, if you want to be automatically approved for coverage without providing any medical information, insurance companies will just assume your health is poor and charge you high premiums. There’s the catch.
We tested this theory by comparing real mortgage life insurance and term life insurance prices. We found that a $500,000 TD mortgage life insurance policy would cost a healthy 31 year old about $70/month. For the same coverage with a term policy, life insurance companies would charge as low as $35/month. That’s half the cost!
Want an instant quote on your life insurance needs? Check out PolicyMe for the easiest way to get advice, compare quotes & buy life insurance.
2. Your bank gets the payout, not your family
With a mortgage insurance policy, your beneficiary is your bank (the same one that charges you every fee under the sun and is open from only 10 a.m. to 4:30 p.m. Monday to Friday). This means that your death benefit goes straight to your bank, skipping right over your spouse and other family members that you really want to protect. With term life insurance, you get to choose your beneficiary, and they get more options to spend the money on the expenses they need.
In the unfortunate event that you die, your family may not want to pay off your mortgage right away. And even if you don’t kick the bucket, you may want to move to another city to be closer to family. You may even be able to afford your mortgage payments and prefer to use the money for other expenses. Unfortunately, mortgage life insurance doesn’t give you this flexibility. It doesn’t leave much room for life to happen.
3. If you change mortgage providers, your mortgage life insurance doesn’t automatically move with you
If you move your mortgage to another lender or bank, you’ll have to be underwritten all over again. You’ll also be subjected to new rates that are almost always higher (of course, they are). If you get sick between when you buy your mortgage life insurance and when you move your mortgage, you can end up paying astronomically high rates. (As if having a serious illness isn’t bad enough.) With term life insurance, you can take your policy with you if you transfer your mortgage to another company, and you won’t no need to reapply or prove that you’re still healthy.
So what are my alternatives?
It’s important to think about your life insurance needs holistically. Separating your mortgage needs and family needs (like food, childcare and other day-to-day expenses) into different policies will often lead to too much protection and high costs.
The best thing to do is to get all-inclusive advice on your insurance needs and buy a term life insurance policy for complete coverage. PolicyMe has developed an honest and convenient way to do just that. In just 5 minutes, you can complete a needs analysis with PolicyMe’s proprietary life insurance checkup. With it, they’ll make sure you’re getting covered for the right amount and with the right policy.
Skipping on mortgage life insurance may sound risky (and not in a theme park thrill ride kind of way). But it doesn’t mean you have to go without coverage. After all, term life insurance is almost always the better option, and it isn’t as expensive as you may think (more on this here).
A drawback to getting term life insurance is that it usually takes 2-4 weeks to get underwritten, and can occasionally be even longer. Mortgage life insurance on the other hand is often issued within days. However, most term life insurance companies provide free temporary insurance coverage during the underwriting process for up to $1 million of coverage, to mitigate this concern. But if the insurance need is urgent, and you don’t have a few weeks to wait, you might consider applying for both mortgage life insurance and term life insurance right away, and then cancelling your mortgage life insurance policy as soon as your term life insurance policy is approved.
So be careful. Banks generally try to sell you mortgage life insurance when you sign up for a new mortgage. And if you agree to it, they’ll add a hefty insurance premium onto your monthly mortgage payments. That’s why it’s always important to make sure you know what you’re signing up for.
When it comes to mortgage life insurance vs. term life insurance, pick term life insurance!
Save money by visiting PolicyMe to compare life insurance quotes online (and get a free personalized recommendation on your life insurance needs!)
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.