If you have bought a home and are arranging a mortgage with a bank, you will probably be asked if you would like life insurance to pay off your mortgage in the event of your death.
Providing insurance to cover your debts when you die is sound financial planning. But should you purchase the bank’s plan or an individual policy?
Life insurance companies underwrite the plans offered by the banks; however, there are some aspects of bank plans that you should be aware of.
First of all, the insurance can be used only for your mortgage. That is, the bank gets the money directly from the insurance company. Your family never receives the money.
Secondly, the insurance company controls your policy, you don’t. Most companies offering coverage through the banks reserve the right to change your premium rates, upon written notice to you. As well, they can cancel your coverage at any time, although the chances of this happening are rare. The policy is automatically terminated if you pay off or transfer the mortgage.
In addition, your insurance coverage decreases as your mortgage balance declines – yet the premium remains the same. So even if half the mortgage has been paid off when you die, the difference between the original amount of your mortgage and the amount you’ve paid disappears. Your beneficiaries don’t receive it. The purpose of the coverage is only to pay the balance of the mortgage owing at death.
Most banks have a maximum amount of insurance you can obtain, as well as age restrictions. And finally, bank managers do not hold licenses to sell life insurance nor are they trained insurance professionals. So they are probably limited in the advice they can provide.
In contrast, individual policies purchased through a life insurance agent have some distinct benefits:
- You control your policy.
- You can designate a beneficiary to receive the proceeds and use the funds as they see fit.
- You can purchase a policy with a level death benefit — or with some policies, an increasing death benefit.
- The premiums are usually guaranteed and can’t be changed.
- You are the only one who can cancel your policy. The life insurance company can cancel your policy only if you don’t pay your premiums
You can also obtain coverage from the banks on a joint basis – that is, the insurance covers you and your spouse. The mortgage is then paid off subject to the rules, on the first death. Similar coverage is available from the life insurance companies as well. Insurance coverage for your mortgage makes good financial sense. But you do have options, so let me shop the life insurance market for you.
