Insurance choices

Insurance choices
by Gary Verity - 10, 2007

Securing insurance to cover your debts is sound financial planning, but should you purchase a plan from the bank or an individual policy?

Life insurance companies underwrite policies offered by the banks, however, there are some important differences that I would like to point out.

Insurance secured through a lending institution can only be used to pay off the mortgage or debt incurred. This means that the bank gets the money directly from the insurance company at the time of your death. This means that your insurance coverage is for the outstanding amount of the mortgage loan and reduces as the loan balance declines - yet the premium remains the same. So even if a portion of the debt has been paid off at the time of death, the difference between the original amount of your mortgage and the amount that you have paid disappears, your beneficiaries don't receive it. The purpose of the coverage is only to pay the balance of the mortgage owing at time of death. Because mortgage life insurance declines in coverage with the mortgage balance, the family sometimes struggles as their needs are often escalating with inflation and other factors and the life insurance would have been more beneficial to them.

Coverage with a lending institution is part of a group policy with the bank being the beneficiary. Your policy is automatically terminated if you pay off the debt or transfer the mortgage. If you change lenders at the maturity of the loan, the mortgage life insurance policy is not transferable. If you are no longer insurable for health reasons at that point, you may not be able to get any coverage anywhere.

Most banks have a maximum amount of insurance you can obtain, as well as age restrictions. Bank managers likely do not hold licenses to sell life insurance nor are they trained insurance brokers, so they are probably limited in the advice they can provide. The law allows mortgage brokers and bank employees with little or no training or experience in the area to market life insurance to borrowers. Banks and lending institutions routinely send life insurance forms to lawyers to be presented to their clients when signing mortgage documents, but lawyers are not trained or licensed to sell or explain life insurance policies. The lawyer's office is not the place to have to fill out a detailed health questionnaire while signing documents for a home or land purchase.

Contrasting this, individual policies purchased through a life insurance broker have some distinct benefits:

1. You can control your own policy because you own it. A policy that only pays off the mortgage and nothing else may not be enough for the needs of the survivors.

2. You can designate a beneficiary to receive the proceeds and use the funds as they see fit.

3. You can purchase a policy with a level death benefit or with some policies an increasing death benefit.

4. Term policies are also convertible to "cash value" insurance without medical examination.

5. An Insurance broker will compare coverage and prices with numerous insurance companies. Financial institutions only offer one option at one price. The premiums are usually guaranteed and can't be changed.

6. You are the only one who can cancel your policy. The life insurance company can cancel your policy only if you do not pay your premiums.

Another important fact is that life insurance proceeds paid to a designated beneficiary on an individual policy are creditor proof and tax-free.

Just recently I was sitting across the desk from my Real Estate lawyer and she informed me that she was in the process of referring a client of hers to a litigation lawyer because the client's husband's mortgage insurance policy had been declined at his death. They had secured the mortgage insurance through a lending institution and due to a pre-existing condition when he took out the policy, it was now being denied. What a terrible reality for this grieving wife.

It is important that you discuss your insurance needs in detail with a licensed insurance broker when you are putting your mortgage loans into place.