Mortgage - Life & Disability Insurance
Why Carry Coverage?
Traditionally, banks have offered their own
in-house life insurance coverage to protect their best interests in the event
the borrower dies before the mortgage is repaid. Although the bank cannot
demand that you carry coverage, they do strongly recommend that some form of
coverage be in place. Do not confuse this type of coverage with CMHC mortgage
insurance (which protects the bank from a high ratio mortgage going into
default). They are separate contracts,
and CMHC has nothing to do with the premature death of the borrower.
Private lenders may also request mortgage
life insurance be in place to secure the loan. Whether a financial institute or
a private lender underwrites the loan, mortgage life insurance brings peace of
mind to the family. Given today's mortgages are usually $100,000+ and amortized
over 20 years, this coverage can eliminate a family's largest debt.
Who Owns the Policy?
With a traditional financial institute like
a Bank, Trust Company, or Credit Union, they own the policy. If you transfer
your mortgage to another lender, the old policy ends, and you must now
re-qualify. Should you now be uninsurable due to a change in health, the new
lender has the right to refuse coverage.
Buying the policy privately through a Life
Insurance Company means you are the owner. Should you transfer your mortgage to
another lender, you can keep the original policy, and its rates based on your
age at issue. You have the right to
keep the policy as long as you like, depending on the term you select, including
the right to lifetime coverage.
Does the Coverage Decrease or Stay Level?
The Bank's coverage will decrease as the
mortgage is paid off, however the insurance premium you are paying stays the
same. Thus fifteen years into a twenty-year mortgage you could easily have less
than 1/3rd of the original coverage, yet your premiums have not
decreased.
A privately bought policy can be designed
so the coverage remains level throughout the mortgage term. This offers your
family additional coverage, over and above the amount necessary to retire the
debt.
Who is the Beneficiary?
With the Bank's policy, they are the
beneficiaries and at the time of death, they essentially pay themselves. The
insurance proceeds do not flow directly to the family.
By owning the policy privately, you can
elect to have a spouse, child or business partner be the beneficiary. The
advantage is that the funds do not have to be used to retire the mortgage
should the individual decide not to do so. If the original mortgage was locked
in a low-interest rate term, it may not be advantageous to pay it off if rates
have increased at the time of death. The individual has the right to reinvest
the funds or make other plans with the proceeds.
Other Considerations
As an independent broker, I can shop the market
for you to negotiate what in most cases is a better price than the Bank's
policy.
A private policy can be designed to carry
additional coverage should the situation warrant extra insurance for family or
business purposes. Some individuals may want additional coverage to protect
other debts like Lines of Credit, personal loans, and unpaid taxes such as
capital gains. The Bank's policy can
only be issued for the actual amount of the debt.
A private policy can have additional
features added on, such as coverage for other family members, critical illness
insurance and personal disability coverage over and above the actual debt.
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