There is NO Good Reason to Buy Mortgage Insurance!
I’m constantly amazed that some people still buy mortgage insurance through their lender. There are so many reasons (in addition to lower cost) that should convince you to set up your loan protection privately yet many still sign on the dotted line and take this optional coverage.
I have yet to hear a valid argument for purchasing mortgage insurance from a lender, but do know of countless reasons not to. Here’s a list of some of the main reasons why you should purchase this coverage privately:
• Underwriting – This is often the most important issue. With a private policy, the underwriting is done at application time and once approved, must be paid out if something happens to you. With lender insurance, they often do underwriting at claim time and can find ways to deny your claim.
• Survivor Options – Your surviving spouse may want to keep the mortgage in place if interest rates are low or other needs for the insurance money have greater priority. If the insurance is held by the lender and the mortgage is paid off, the surviving spouse may find out they can’t qualify for a new mortgage.
• Flexibility – When it comes time to renew, you have the ability to switch lenders if your current one is not offering you a good renewal rate. Your insurance policy goes with you and there’s no need to re-qualify.
• Beneficiaries – You own the policy and therefore choose the beneficiaries for your coverage. If you buy it through your lender, you pay for the coverage but the bank pays themselves!
• Guaranteed Rates – Your premiums are guaranteed for the life of the term you choose.
• Double Benefits – A private life policy can provide benefits for both spouses. If they were to pass away at the same time, this would leave additional amounts available for surviving children or other beneficiaries.
• Level Coverage – As your mortgage balance goes down, the benefit amount stays the same. With lender insurance, you generally keep paying the same each month for less and less coverage.
• Costs – In addition to all of the added benefits listed above, premiums of private coverage are generally much lower than lender insurance. You also have the ability to combine your mortgage and other insurance needs into one policy and further reduce your costs.
• Preferred Pricing – With advanced underwriting, you may qualify for additional discounted rates.
Insurance offered through a lender is called many names including “creditor insurance”, “mortgage insurance” and “loan insurance”. This coverage is not designed with your best interest in mind and is often imbedded deep in the mortgage application paperwork. Many unsuspecting consumers are simply told to “sign here” and are not explained what they’re really agreeing to or that it’s entirely optional.
The good news is that even if you’ve already got your mortgage in place and signed up for this coverage, you can still get your finances back on track. There is generally no commitment term to mortgage insurance and you can cancel and set your own private coverage up at any time. Having said that, make sure you don’t cancel your existing coverage without setting your new protection in place first! You need to ensure that you have coverage in force the whole time while you make this change.
Although the above focuses on life insurance to cover a mortgage debt in the event of death, it’s also important to consider disability coverage to pay the mortgage if you are unable to work.
Finally, make sure you talk to a financial advisor that has access to all insurance companies and not just one or two. Prices vary widely among rates for different ages with each company and you need to have a quote comparison run that shows which provider has the best option for you.