Mortgage Insurance is not the same as Life Insurance

How many consumers know that Mortgage Insurance or Credit Insurance is not the same as Life Insurance ?

Mortgage insurance or Credit Insurance is not the same as Life Insurance but I fear that too many consumers don’t know the difference.   A lot of Mortgage or Credit Insurance is sold by lenders when consumers purchase a home or take out a line of credit. Lenders know how to lend but I question lenders being the right ones to sell consumers insurance. Could it be that one of the reasons that consumers don’t know the difference between Mortgage or Credit insurance and Life Insurance is BECAUSE they have purchased it from their lender? I believe it’s quite possible.

There are key differences between Mortgage or Credit insurance and Life Insurance.

Here are 4 Big Differences :

  1. Post Claim underwriting:  That’s the way Mortgage insurance works. But what does that mean? It’s all about the timing of the underwriting.  Underwriting for mortgage insurance is only done when and if you have a claim. Life insurance by contrast is underwritten when you purchase the policy. What that means is that the individual buying the mortgage or credit insurance may not be covered when they think they are, because they may not qualify for the coverage when they buy it. Paying premiums but no actual coverage?         Yes. That sounds crazy and a bit risky. Not having complete certainty about whether or not mortgage or credit insurance will payout can really hang a cloud over a financial plan. Google  “Mortgage Insurance Horror Stories if you have a strong heart to read or watch some heartbreaking tales of those who experienced a family death only to have a mortgage insurance claim denied.  Or watch the video from CBC marketplace on mortgage insurance vs. life insurance     CBC Marketplace – In denial
  2. Your family is not the beneficiary: In all the flurry and stress that can accompany buying a new house and signing all of the paperwork that comes with a mortgage,  consumers can often fail to notice  that their lender did not mention the subject of a beneficiary. That’s because  the lender is the automatic  beneficiary of the death benefit in a Mortgage or Credit insurance policy.  A  false sense of security may exist that cash will be made available upon the death of an individual with mortgage or credit insurance. Circumstances can and do vary greatly when an individual with a mortgage dies; paying off the mortgage may or may not be the best option. Cash might be more important.
  3. Same Premium Cost/Declining Benefit: Most of us understand why there’s an increasing premium over the course of a life insurance policy to retain the same amount of insurance as one ages. It intuitively, makes sense. But that’s not the way Mortgage insurance works. In the case of Mortgage insurance, consumers pay the same (high) premium even though the coverage or benefit (payout) is actually decreasing as the mortgage is paid out over time.
  4. Mortgage insurance is not portable: When changing lenders, mortgage insurance does not move with the mortgage. Higher rates based on age might apply that need to be factored in. With life insurance there is no need to ‘requalify’ for insurance and often with a renewable and convertible term policy, it can be converted to a permanent product at any time without a medical exam.

These differences are significantly significant. 

I think that the differences between Mortgage/Credit insurance and Life insurance are too significant to be left to chance. Often consumers purchasing Mortgage or Credit insurance are doing so at a time of much stress; taking on debt is always stressful. When signing a mortgage, getting a line of credit or taking out a car loan, I suspect that many believe that they will be looked upon unfavorably by their lender if they chose not to take the insurance at the same time. It might have to do with the very serious looking waiver that needs to be signed when a borrower declines,

The Option is real Life Insurance for real risk management 

The vast majority of financial experts agree: Life insurance provides better coverage, more Flexible coverage and in most cases less expensive coverage to reduce the financial risk that occurs when a borrower dies with outstanding debt.

The staff that consumers deal with through a lender are not licensed insurance professionals. So it’s hard not to question… Why are lenders selling mortgage or credit insurance when they are not trained for the specifics?

At the risk of losing credibility, I’m going to admit (for the greater good), that I found myself ain the middle of a credit insurance misunderstanding a few years ago when an increase in a line of credit was required a few years ago, as we closed on a house before selling a house we were moving from. Here are some of the gory details that took place between ourselves and a Big Bank Lender:

  • No information on premiums was provided
  • No health information was requested (See #1 above re: the way underwriting works for credit or mortgage insurance)
  • Outrageously expensive premiums of varying amounts were added to a line of credit each month. While I made notice of them, I fear others may not have noticed or questioned them.  I did both.
  • When questioned; our bank manager could not provide any information about the premiums. When I suggested we would move our business elsewhere, she agreed to reimburse and she did so; reimbursing us in varying amounts between $300-$500/month like it was from some sort of petty cash fund.

That’s an odd and surprising way to gain reimbursement of credit insurance premiums. Getting reimbursed was my main priority at the time, but many questions stay with me even a couple of years later:

  • Why was the reimbursement made in this way?
  • How were those premiums calculated since they varied so much over the few months that they were charged?
  • Why was proper documentation of the mortgage insurance not provided initially or after the fact?
  • How many other consumers are paying outrageous Mortgage or Credit insurance that they have accepted either without question without realizing?

What I do know, is that change is needed.  At minimum, consumers need to be made more aware and more financially literate about the differences between Mortgage or Credit insurance and Life Insurance. Mortgage insurance benefits creditors or lenders first;  but personal life insurance benefits individuals better. 

Take time to investigate and learn.

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