When acquiring a mortgage, you'll likely encounter the need for mortgage loan insurance, especially if your down payment falls below 20%. Additionally, your financial institution may present you with another insurance option: mortgage life insurance.
It's crucial to distinguish these two products. Mortgage loan insurance protects your lender by reimbursing them if you default on your loan. Conversely, mortgage life insurance covers your loan balance in the event of your death. However, the latter is entirely optional.
Here are 10 good reasons to decline the mortgage life insurance provided by your bank.
Mortgage life insurance: the disadvantages
1. Insurance premiums are often more expensive
Insurance premiums for mortgage life insurance are often higher because they are determined by factors such as:
- Your mortgage balance
- Your age
- The amortization period
- The interest rate
- The number of individuals being covered.
Given its lack of consideration for individual circumstances, mortgage life insurance tends to be more expensive. By exploring different insurance options, you’re more likely to find a more competitive rate.
2. The guaranteed benefit only covers your mortgage balance
Unlike private life insurance, which allows the insured to choose a fixed capital amount, mortgage life insurance provides coverage that decreases over time. It's crucial to recognize that this insurance solely aims to cover your mortgage balance in the event of your death, ensuring repayment to the financial institution and preventing your loved ones from losing the home.
Therefore, if you initially secure life insurance for $500,000, but your mortgage balance upon your passing is only $125,000, your beneficiaries won't receive the $375,000 difference.
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3. Your eligibility is not guaranteed
Obtaining mortgage life insurance is quick and easy, requiring only a questionnaire with no medical assessment. However, the true implications emerge upon death.
Only during the claims process does the insurer evaluate your health status to determine eligibility. Therefore, even a minor error in your declaration could lead to a denial of payment, leaving your loved ones burdened with debt despite your intention to protect them financially. The premiums you've paid might prove to be in vain, although there is a chance of reimbursement.
4. Your insurance is tied to your mortgage
Your mortgage life insurance, as the name suggests, is directly tied to your mortgage. Consider what happens if you decide to transfer your mortgage to another financial institution upon renewal. This is an important question to ask yourself.
If you switch lenders, your life insurance won't transfer with you. To ensure continued coverage for your mortgage in case of your death, you'll need to obtain a new policy, and the premium will be reassessed.
5. The amount insured doesn't take your real needs into account
What matters to your lender is getting his money back, which leads to the decision to solely cover your mortgage balance. Consequently, there won't be an examination of your financial needs to identify:
- The amount necessary for your loved ones to sustain their expenses following your demise.
- Whether you're already covered by group insurance.
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Private life insurance: the advantages
6. You can choose the insurance best suited to your needs
With private life insurance, you have the flexibility to choose both the coverage duration (term or permanent) and the guaranteed amount. The determination of this amount will consider:
- Your family’s circumstances
- Your existing debts
- Your short – or long-term aspirations such as starting a business, purchasing a home, or approaching retirement.
Furthermore, the payout remains consistent until the occurrence of a claim.
7. Your coverage is secure
Insurance companies carefully evaluate the insurability of prospective customers, assessing the risk they represent as insured individuals based on factors like age, health, and lifestyle.
As a result, if you adhere to the policy's clauses and maintain premium payments, your loved ones have nothing to worry about when it comes to receiving the compensation due to them.
8. You can cover all your properties with a single policy
One significant advantage of having a personalized insurance policy is that you don't need to acquire multiple policies to cover all your needs.
This flexibility is especially advantageous if you own multiple properties or plan to grow your real estate portfolio. By opting for an individual life insurance policy, you have the freedom to determine the guaranteed indemnity amount, allowing you to cover the mortgage balances of all your properties simultaneously.
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9. You can choose your beneficiary
With mortgage life insurance, your choice of beneficiaries is limited; it must be the financial institution that provided your loan.
However, with an individual policy, you have the freedom to choose your life insurance beneficiary. You can even designate more than one person if you wish.
In the event of your death, your chosen beneficiary will receive the benefit. They can then use it to settle your loans, and, if necessary, use the remaining sum to cover other expenses.
10. You can convert your term life insurance into permanent life insurance
Mortgage life insurance typically terminates when your mortgage ends, regardless of whether the loan is fully repaid before your death.
On the other hand, with a personal term life insurance policy covering your mortgage's duration, you have the flexibility to convert it to a permanent life insurance policy after the term ends. Thus, you won't feel that you've been paying premiums for nothing all these years.
Explore various life insurance options
Exploring various life insurance options beyond what your bank offers can be advantageous. Compare products from different insurers to find the one that best fits your needs.
If you need assistance, consider working alongside an insurance broker. They're experts who can help you find the product that suits you best and secures the most favourable rate.
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