by Glenn Cooke
Welcome to our channel on mortgage life insurance. My name is Glenn Cooke and I’m with Only Insurance. This video is the first in our series on mortgage life insurance.
Today we’re going to look at mortgage life insurance vs term life insurance. If you’ve been doing some research online after being offered mortgage insurance through your bank, you’ve likely seen this comparison as something you should be looking into. Over the next 7 minutes we’re going to do a deep dive into the various differences between these two insurance policies.
First, lets start with a basic definition. Mortgage life insurance offered by the banks is a type of group creditor protection. The group part means that the policy is actually owned by the bank not the consumer. The creditor protection part means that the insurance is tied to a debt, in this case your mortgage. That tie to your mortgage will become important in some of the things we’re going to discuss.
Term life insurance is an individual life insurance policy offered directly to consumers by life insurance companies. You are the policy owner so you have control over the policy. The term part of term life insurance means that the premiums are level for a specific period of time – generally 10, 20, or 30 years. Because it’s an individual policy, term life insurance is not specifically tied to a debt, even if the debt is the purpose behind purchasing the coverage.
With the definitions done with, we’re going to look at the three primary differences between mortgage life insurance and term life insurance – price, benefits, and claims payment.
Lets look at price first, because that’s an easy comparison – it’s just numbers. I took a male age 46 for $500,000 of coverage. Mortgage life insurance through the banks ranges in price from $200-$220/month. A 20 year term policy on the other hand, can be had for about $80/month.
That’s a huge difference – for that case, mortgage life insurance premiums are over twice what a 20 year term policy costs. So in the comparison of premiums, term life insurance is typically far cheaper than mortgage life insurance.
Which leads us to our second comparison – benefits. It turns out, that mortgage life insurance simply doesn’t compete with a term life insurance policy.
Lets start with the coverage amount. $500,000 if you die is $500,000 dollars, right? Well, not so fast. A term life insurance policy maintains that $500,000 of coverage level for the duration of the insurance policy. Not so with mortgage life insurance. With mortgage life insurance, your coverage goes down as you pay down your mortgage. You end up paying the same premiums for an ever decreasing amount of coverage.
Lets look at the premium guarantees next. Term life insurance has premiums that are guaranteed to be level for the term of the policy; again that might be 10, 20 or 30 years depending on the type of policy you purchase. Mortgage insurance premiums are level for an undefined period of time – to the earlier of either you paying off your mortgage, or until you switch banks for your mortgage. If you switch banks or mortgage providers,you’re going to be looking at a new, higher premium every time you make that switch – which, if you’re a shopper, could be every 5 years. You can see that your mortgage life insurance premiums can therefore increase due to factors not associated with your insurance coverage at all. Once issued, a term life insurance policy’s premiums cannot change for the duration of the term.
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Next, lets look at what happens if you become uninsurable during the course of the policy. A quick glance suggests that nothing happens to either policy – you just continue paying the premiums. But, remember when we said your mortgage insurance is over if you switch mortgage companies? Lets say your mortgage is up for renewal and you want to switch companies. That means you’re going to be looking at new mortgage life insurance at the new company. But wait, we just assumed that you’ve become uninsurable. Which means no new mortgage life insurance. That’s right, you can lose your life insurance entirely if you become uninsurable and switch providers. Again, because term life insurance isn’t specifically tied to your mortgage, there’s no change.
But there’s another difference – term life insurance has a very important benefit that mortgage life insurance does not. That benefit is called conversion.
Conversion lets you exchange your term policy for a permanent, lifetime policy and get healthy premiums without taking a medical exam. Yes, you can swap your policy for a lifetime policy, no questions asked, no matter how uninsurable you are.
So if you become uninsurable with morrgage life insurance, you could be in a position of losing your life insurance coverage just because you switch mortgage providers. With a term life insurance policy you actually have the option of extending coverage for your entire life, without a medical exam.
Another important difference is in your beneficiary. With mortgage life insurance, if you die, the beneficiary is your bank. So, I guess that’s nice. With a term life insurance policy, you define who your beneficiaries are, often your partner.
Two other quick advantages of term life insurance. First, you can purchase term life insurance directly online from our website at mortgageinsurance.ca – no saleperson will visit. With mortgage insurance, you’re likely going to be going to the bank to discuss. Secondly, if you should ever need service with your policy, a term life insurance policy will let you contact your broker, which through mortgageinsurance.ca would be Only Insurance. With mortgage insurance, you’re probably going to be dealing with a call center, so good luck with that.
Now, I’ve saved the best, or perhaps the most horrifying for last. It has to do with probability of claims payment – what happens when you die. In this comparison we don’t actually have access to published numbers so we’re going to use common sense and our experience. Nevertheless, what I’m about to tell you has been documented by authorities such as CBC Marketplace.
Mortgage life insurance uses what’s called post claim underwriting. That means that when you purchase the insurance, no underwriter actually looks at your application. It just gets filed and you start paying premiums. They don’t pull the application to review it and decide if the coverage is valid until after you die. This is a huge cost saving measure because instead of reviewing everyone’s applications, they only review those of the people who die and make a claim.
Now, in a perfect world that wouldn’t make a difference. But if you’re answering these medical questions with the assistance of your local bank staff, there’s a pretty good chance that you could screw up. And when do we find out that you screwed up? After you die and the insurance company looks at your application and pulls a doctors report – that’s the post-claims part. And if they deny the claim, what’s your recourse? Not much, given that you’re dead.
With term life insurance, you’ll do a medical history interview with a trained person from a paramedical company over the phone. Next, an experienced underwriter will review all the documentation and your history before the policy is issued. If there’s a mistake, they should find it and be able to clarify it before they even issue the policy.
The end result of that is that mortgage life insurance policies have a much higher probability of denying claims that a term life insurance policy. Again, we don’t have published numbers for this, but we do have experience and things like CBC marketplace exposes that have documented this.
So there you have it – term life insurance wins hands down over mortgage life insurance. It’s got cheaper premiums, far better policy benefits, and is more likely to actually pay out.
If you’d like to look at term life insurance to cover your mortgage instead of mortgage life insurance, I’d encourage you to visit mortgageinsurance.ca. There you can compare term life insurance prices for different policies, look at adding critical illness insurance, and actually apply right online through the website. You can go there now by clicking on the mortgageinsurance.ca logo at the bottom of this video.
Thanks for watching, and we’ll see you next time.