BY FAZAAD BACCHUS
Buying a home is one the most important purchases you will make during your lifetime.
At first there is the stress of finding the right one, considering affordability, location, organizing your financing etc. Then comes the day of moving in, a day filled with great joy at the ownership of such an important asset and possibly your family home.
You realize soon enough that the payments are mounting, the mortgage, the utilities, minor renovations, yard work, property insurance, its all adding up.
Typically it’s hard enough for two people to manage in the early stages of a home purchase let alone one. For this reason many are advised to take out a mortgage insurance just in case something were to happen to one party, the other would not have to return the property to the bank.
However when it comes to buying life insurance to cover the balance on the mortgage, I do agree it’s an extremely important aspect when buying a home, it begs the question from whom should you purchase. Should I use the coverage offered by my lender namely the bank or should I use an insurance company. It’s a matter of convenience to use the bank, you are right there signing the mortgage papers and you are asked the question of whether you would like to have some insurance to cover the loss at a very small cost. It’s easy to say yes and end the hassle, but I would like to submit to you that you need to consider the following reasons before making such a decision.
Post Underwriting: When you buy from your lender, you are not required to do a medical, just answer a few medical questions and you are covered. A bank’s mortgage coverage does not do full underwriting on the policy at the time it is bought but only when a claim is made, therefore there is no guarantee that the claim will be paid. On the other hand an individual policy bought from a Life Insurance company requires full underwriting upfront ensuring that your policy is guaranteed unilateral contract.
Coverage is not portable: If you decide on selling your home to upgrade or decide to move to another lender due to better rates, your coverage will automatically cancel and you have to reapply all over again. Premiums will now be higher due to higher age and may even be declined due to medical conditions. With an individual policy, you can carry the coverage regardless of which lending institution you choose to borrow from.
Reducing Coverage: Your bank’s coverage is tied in directly with the mortgage balance, therefore if you have a small balance remaining, that’s all the coverage you have also. Coverage decreases whilst the premium remains level. With an individual policy, your coverage remains the same throughout the term of the mortgage wherein if you were to die, there would be some amount of money left over to do other things, like funeral, leaving monies for family etc.
The bank is the beneficiary: When you have mortgage insurance from the lender, it is the lender who is protected as it is the lender who is the beneficiary. You have no say in this matter; yes the money is used to pay off the mortgage, but what would be the case if you needed money for more pressing things like settling funeral costs etc? When you have an individual policy, you can name your beneficiary and you can decide how to distribute the proceeds from your policy.
It is my opinion that you should choose an individual life policy’s coverage over your lender’s coverage. If you currently have the latter, talk to you financial advisor on how to go about changing it or drop me a line and I will see how I can help.