Friday, July 24, 2009

Is Your Mortgage Really Insured?

It baffles me how many people can be sucked into one of the truly great scams of this century (and the last one too). You have just finalized the purchase on your first home with all of the assoicated problems (getting approved, finding the perfect home, negotiating the price etc). Now the time comes to sign on the dotted line for the priviledge of a financial institution allowing you to stay in one of their "homes" in return for the largest part of your paycheque. Just before signing, the loans officer asks you whether you want to "insure the mortgage". You're spending $1400 per month in mortgage payments; what's another $50 per month. You quickly sign the paperwork and file it with the rest of the mortgage documents and forget about it.

Well, I hate to be the one to tell you this, but you are now offically a (see picture at left). Why you may ask? Well the old saying that if it sounds too good to be true comes into play here. When you arrange for mortgage insurance at the "bank", in fact you are purchasing "group creditor life insurance". Coverage with a lending institution, is part of a group policy owned by the lender, and you, the borrower, have no control. What if you decide to buy your own policy.

With your own policy, your premium is guaranteed and fixed in advance, but group policy premiums may be subject to fluctuations if the lender raises charges for the whole group.
Your own policy is for any amount of coverage you want. If you already have insurance, you can add the mortgage amount to your existing policy. Insurance with a lender, however, is for the outstanding amount of the mortgage loan, and reduces as the loan balance declines.

An insurance company cannot cancel or refuse to renew your own policy, but a policy married to your mortgage can be cancelled by the lender or the issuing company. Bank employees are not licensed or trained to look at the borrower's overall need for life insurance. Independent insurance agents and brokers examine the client's total insurance needs, and not just the payment of the mortgage.

One of the most important benefits of owning your own policy is the ability to switch lenders when the mortgage matures. If your policy is linked to the mortgage, it terminates if you refinance or pay off the mortgage. If you switch lenders but have become uninsurable for health reasons during the original mortgage term, your old coverage terminates. What if you move? Under some group creditor plans, you may need to requalify for coverage. An individual plan faces no such problems.

Well at least the plan from the "bank" is cheaper than an insurance company right? Think again. Depending on whether you smoke or not, the insurance company could be significantly cheaper - as much as 30%. You are not penalized for paying down your mortgage quickly as you are under a "group plan". If you want an entire list of the pros of an individual plan over a "group creditor" plan, it would take 45 minutes of reading.

Last year, CBC broadcast a segment on their "Marketplace" show on the perils of "group creditor" insurance for mortgages. The only issue I had with the broadcast was that they pointed the finger at the insurance companies for not paying claims.
The issue presented in the show is not with the insurer or the lendor but specifically with the product and the way it is marketed. Check out the link and watch the video. They presented it in an interesting way and it certainly shocked many people who watched it judging by the "comments" on their website.

So why would people intentionally buy an obviously problematic plan, with numerous issues attached, at a price that may be no bargain you may ask? I have only come up with three possible reasons.

  1. The lendor indicates that you must purchase the plan from them. They may also suggest that you cannot get the mortgage without it. This sort of coercive or tied-selling is illegal and should be reported to the bank's ombudsman. In fact, the plan is cancellable at any time by simply sending a letter to the insurer.
  2. The process is simple. They ask a few simple questions and you "qualify". Buying from an insurer means you may need to go through a medical exam/blood/urine tests/ doctors reports and see if they would be willing to insure you. INSURERS TEST YOU UP FRONT. We buy insurance to protect things. We don't want problems. Group creditor coverage works in a different fashion - investigating you when you have a claim. If you made a small "mistake" on the application, your claim could be denied.
  3. Ignorance. I firmly believe that this is the biggest reason. Ask some of your friends or co-workers if they insured their mortgage? Then ask if they did it with their lendor? For these people, send them a link to this blog and help them avoid a possible catastrophe.

Stay Well and Pay It Forward.

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