Mortgage life insurance is an awful financial product

Mortgage Life Insurance 8

Mortgage life insurance seems like a good idea

 

At first glance, mortgage life insurance obtained from your bank sounds like an excellent idea. You’re buying a home for your family and sign up for a loan that will take decades to repay. While you’re signing documents for your mortgage, your bank rep mentions the benefits of getting mortgage life insurance – peace of mind, complete repayment of your mortgage in case you or your spouse pass away, and relative low cost (when compared to your mortgage amount that is). Sounds like a responsible thing to do to protect your family, right?

Mortgage Life Insurance

Mortgage Life Insurance

When we bought our home few years ago, we had this exact conversation with our mortgage specialist. Fortunately, I had enough brain cells to say that I needed more time to research it, and I started digging around. After looking into details of the mortgage life insurance offered by the bank, I found several reasons why it’s an awful product, and should be avoided at all costs – unless your hobbies include wasting money.

 

Mortgage life insurance is too expensive

 

Just out of curiosity, I’ve looked up the cost for mortgage life insurance on TD Canada Trust website. For example, you’re buying a small house and taking out a mortgage of $400,000. To obtain life insurance for a mortgage of this amount, you and your spouse (in my example you’re in your 30s) will have to pay $105.00/month (after generous 25% discount). If your mortgage amount is higher or if you and your spouse are older, the monthly expense will be higher.

 

Mortgage Life Insurance

Mortgage Life Insurance

 

This is extremely expensive when compared to simple term life insurance that can be obtained through independent brokers. Similar coverage of term life insurance would cost you less than $40/month and offer more to you – as I discuss it late. Even our life insurance policy offers superior coverage and flexibility.

While $105.00/month might not seem like a big deal when compared to your mortgage payment, the value just isn’t there. Also, keep in mind that your coverage will be going down as your mortgage is being paid down – while your premiums will stay the same.

 

No guarantee of paying out

 

Typical life insurance policy obtained through insurance broker is actually underwritten when you sign the contract and the risk is assessed prior to this. Once you enter the contract, the payout is guaranteed in case you or your spouse die. Insurance agencies take this step very seriously, and take every step possible to assess your health before the policy is signed. In our case, we had to go through a medical examination performed by a registered nurse to make sure our level of health is reasonable and we are insurable.

Mortgage life insurance is a bit different in a sense that it’s underwritten at the time of the claim. Bank won’t access your health prior to signing the documents; you simply fill out a short questionnaire about your health. If the unthinkable happens, the bank can actually deny the coverage simply because you weren’t insurable. The fact that you didn’t know about your heart condition won’t make any difference.

Check out this episode of CBC Marketplace on mortgage life insurance:

 

 

 

Mortgage life insurance is controlled by the bank

 

If I had mortgage life insurance for our home, and got hit by a bus, the payout would go straight to the bank holding my mortgage because the bank is the beneficiary for the insurance policy. My wife wouldn’t be able to make a choice on what to do with insurance money – it would simply pay off our mortgage. In case of private insurance, the proceeds would be given to my wife tax free with her choice of actions – pay off the mortgage, invest the money, or build a giant Rocky-styled statue of me.

Another thing to keep in mind is that your mortgage life insurance policy is attached to your mortgage. If you sell the house – the policy gets canceled. If you renew the mortgage – the police needs to be renewed. If you miss a payment – your policy gets compromised. In other words, you have no control over it whatsoever.

 

Why do banks offer mortgage life insurance?

 

Mortgage life insurance is an easy sell for bank employees to push to their clients as an added bonus. Any responsible adult would think about protecting their family from unexpected death. But mortgage life insurance offered by most banks is not the right way to do so. In reality, it protects the banks more than it protects you. It is also a great money maker for them given extremely high price and poor value of it to the consumer. No wonder bank employees are told to push this awful product!

 

What is the right way to go?

 

Don’t get me wrong, protecting yourself and your family is important and insurance can be a beautiful thing. It is your responsibility to make sure your family won’t suffer financially if you or your spouse suddenly passes away.

But mortgage life insurance offered by the banks is an awful product that offers very little  value. If I were you, I’d consider obtaining term life insurance from an independent insurance company. You will be able to control the coverage amount and what happens if the policy pays out. Your premiums will also be much lower than what the bank will offer you – and who can’t use some extra money these days?

My name is Financial Underdog, and I’m not impressed with mortgage life insurance!

Follow-up on life insurance

Just wanted to follow up on this whole life insurance business. It just so happens I witnessed a rather serious car accident today right in front of me – thankfully nobody got seriously hurt – but it got me thinking how fast life can go the wrong way. One moment you’re driving down the street drinking your daily coffee and thinking what needs to be done today …. and next, you get T-boned by another vehicle, your truck gets flipped on the side, and you have to climb out of the side window bleeding from your ears. Life seems cushy sometimes, like a Groundhog Day scene being played out over and over again, and then takes a terrible turn. You have to be ready – and once the dust settles, you better be protected as it’s kind of late to buy insurance.

Think about your loved ones. They deserve protection along with you. Think of worst case scenarios – how can you be prepared for them? Do you have content insurance for your condo/house? Proper insurance for your cars? Liability insurance on your business? Life insurance? Disability insurance? Critical illness insurance?

Here’s cool infographics file on life insurance. Keep in mind, it was created by a whole life insurance company, so the bias towards whole life vs. term life is somewhat obvious. But other information is rather eye-opening:

Life Insurance Infographics

 

Life insurance

Well, this is exciting! We now have life insurance!

policy

What kind of policy did we get?

We’ve decided to go with a simple term life insurance (term = 10 years) with a bonus critical illness insurance. We can decide to renew the insurance once the term is up (although it will be considerably more expensive as we age), but at the moment it serves all our needs. While we’re in the accumulating wealth stage, we’d like to be insured against major events in life that will put us at risk – such as critical illness or death.

The life insurance policy pays out in case of mine or my wife’s death (trust me, it was a very weird conversation about death – people usually try not to think about it let alone planning for it). We’ve chosen $750,000 as a payout – that amount would cover the complete repayment of our mortgage – currently around $200,000 and the balance would provide income replacement for either of us when invested conservatively. So, if I drop dead tomorrow, my wife will be able to pay off the mortgage, and not alter her lifestyle in any way because the income will still be there.

The critical illness insurance covers a list of conditions that would trigger a payout. For example stroke, hearth attack, cancer, etc. This insurance would make sure we’re perfectly able to weather the short term storm of troubles such illness would bring – we wouldn’t have to choose between recovering from cancer or going to work to provide the paycheck. We could put money in the bank, stop working for a while and make sure we’re fully recovered before going back to work.

Why did we get it?

The idea behind term life insurance is to protect us while we’re accumulating our wealth. Before being insured, if I dropped dead, my wife wouldn’t probably be able to maintain the lifestyle as is. She would probably would have to sell our house to get into something smaller as carrying our mortgage on one income would be hard. Ten years from now, we’re hoping to be completely self-insured – meaning with wealth accumulated and our mortgage paid off, my family would be just fine without my income. But right now it’s not the case – and that’s why insurance is critical. Also, we’re talking about having kids at near future – protecting them is also part of our plan.

How much does it cost?

Surprisingly, not a whole lot. Our combined monthly bill for both of us is 132.34. That’s it! And what is $130 these days? A meal at a restaurant and may be a lunch together. By giving up an occasional meal, we’re gaining financial peace for our family knowing that we’re protected if the unthinkable happens. Sure, it’s still a $100 a month in added expenses, but it protects us from a world of financial hurt. Personally, I sleep better at night! Family is everything to me, and knowing that my family will be just fine if I get hit by a bus tomorrow – it’s money well spent.

Interestingly enough, if you look at the breakdown of premiums, the life insurance part is less than half of the amount. Critical illness insurance is slightly more than half – simply because people are more likely to suffer from a critical illness than to die – especially in our age (early 30′s). One of the clauses in our policy actually specifies the repayment of our premiums if we don’t trigger the critical illness clause – so if we don’t use that part of the insurance, the insurance company will repay all of our critical illness premiums. Neat, eh?

What life insurance doesn’t cover?

Some conditions in our life insurance are not covered (and understandably so) – such as suicide, acts of war, dying in the process or result of illegal activity, and driving drunk. So, if I was to kill myself after having a few too many at dinner or jumped off the bridge – no payout. Makes sense, if you think about it.

What was the process of getting it?

Our financial advisor recommended we get it to protect ourselves. After doing some research on my own, and consulting with other people, we’ve settled on the specific amount, insurance company, and other details. It was a great relief for me that our advisor didn’t recommend us a whole life or universal life policies. The commission they get from them is much higher, but they’re terrible financial products. It’s good to know that our financial advisor has utmost integrity and chooses products that are good for us, and not for him.

Once we’ve settled on details, we’ve been issued a temporary insurance that would cover us while we’re in the process of signing the documents. Your premiums depend on your health and family history, so the insurance company actually sent a nurse to our house one day to conduct a series of tests. A local nurse who is a contractor for life insurance company measured our blood pressured, asked questions about family history, took a pee sample (yes, you’ll have to pee in a cup), and some other tests. After they analyzed the results, they approved us at normal rate, and issued insurance policies.

Now, if they were to find traces of drugs in our urine or find signs of tobacco smoking, our premiums would be astronomical – because the chances of getting seriously sick or dying are much higher in that case. Good thing neither me or my wife do any drugs. She never smoked in her life, and I quit about 4 years ago.

Some interesting facts:
– Life insurance for women is cheaper than it is for men. Because men are more likely to die earlier.
– 41% of people in US do not have life insurance of any kind.
– Recommended life insurance amount is usually 10 times your income. So, if you make $40,000/year, pick $400,000 as your payout at the minimum. We’ve also chosen to add mortgage balance into consideration – and the increase in premiums was quite minimal.

That’s it for today. Feel free to ask me any questions about our process of getting life insurance.

I’m The Financial Underdog, and I approve this message!