Thursday, November 01, 2012

Mortgage Life Insurance

I think the title of this post is pretty self explanatory.

Basically what Mortgage Life Insurance is life insurance so that if you die, and thus cannot pay your mortgage payments, your family members can collect the insurance and the lump sum will be enough to pay off the remaining mortgage on your home.

Although in theory, you could just get a standard life insurance policy, with a big payout, enough to cover the mortgage and a little left over.

Except that the actual value of the mortgage goes down over time. Which means that in theory the cost of the insurance should also go down over time. Except that isn't how it actually works. Instead the premiums keep going up as the person gets older, even if they are in perfect health.

Thus Mortgage Life Insurance ends up being very profitable for insurance companies because the premiums keep going up and the payouts decrease over time. It is so profitable that many banks now sell Mortgage Life Insurance too whenever someone asks for a mortgage and the bank employee gets a commission every time they sell someone a policy. Some of it even verges on "Tied Selling", meaning they give you the mortgage and pressure you into the insurance to the point that you don't have any other choice.

1st Note: Tied Selling is illegal in many countries, including Canada.

2nd Note: Buying Mortgage Life Insurance is not mandatory when buying a mortgage. There is no laws requiring it. (In some countries bicycle stores are required by law to make sure you have a bell and helmet if a child wants to buy a bicycle. Because if the kid gets killed on the bicycle and they weren't wearing a helmet, the bicycle store can be liable for not asking if they owned a helmet. In theory they are supposed to sell you a bell and helmet if you don't have one.)

3rd Note: This should not be confused with Private Mortgage Insurance, which is meant to protect the lender against the risk of default on the part of the borrower.

When the Mortgage Life Insurance commences, the value of the insurance coverage starts off being equal to the capital outstanding on the repayment mortgage and the policy’s termination date will be the same as the date scheduled for the final payment on the repayment mortgage. Thus when the mortgage is paid off the insurance is likewise terminated. The insurance company providing the Mortgage Life Insurance calculates the annual rate at which the insurance coverage should decrease in order to mirror the value of the capital outstanding on the repayment mortgage. Even if the client is behind on mortgage repayments, the insurance will adhere to its original schedule and will not keep up with the outstanding debt if the person falls behind on payments.

Some mortgage life insurance policies will also pay out if the policyholder is diagnosed with a terminal illness from which the policyholder is expected to die within 12 months of diagnosis, but many will refuse to pay and declare the policy void. Insurance companies sometimes add other features to a Mortgage Life Insurance policy to reflect economic conditions, problems in the domestic insurance market and various domestic tax regulations.

The thing is that when it comes to actually buying Mortgage Life Insurance there are a lot of companies out there, and you don't know which ones actually will payout if there is ever a problem such as the policy holder being diagnosed with cancer and then their family being left out to dry with the insurance company refuses to pay.

Thus lets pretend for a moment you are considering getting Mortgage Life Insurance... Which company should you hire? How much should the premiums be? What are the guarantees they will actually pay out?

Well, the wisest answer is to shop around and ask. Compare prices. Don't be pressured with a big sales pitch or shiny one-time discounts (those are tricks to get you to sign up today).

Why? Because I honestly can't tell you which companies are the best. Although in theory you could research various companies online and try to determine which ones have a good reputation. Proceed cautiously and don't assume that just because its a bank trying to sell you the mortgage that they are any more reputable. Banks are in the insurance business to make MONEY. And that person trying to be all friendly and selling you the policy just wants their commission for kissing your behind.

Now you might think, oh what the heck, just get the first policy you come across. No. Proceed cautiously and wisely. Especially if you already have health problems and the insurance company may try to refuse to pay out to your relatives after you are gone.

Note: Car dealerships do the same thing, selling you insurance car loans. Buyer beware.

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