When buying a house, many people have a list of professionals that they go and see. They find a realtor and a real estate lawyer. They find a mortgage broker or a banker to secure the mortgage. From that point, there is a search for a home inspector, a property insurer and sometimes a designer or architect. Buying a house is an important and time consuming endeavour.
In all of that confusion, it is understandable that many new homeowners forget to phone their life insurance agent. For when their banking officer or mortgage broker asks them one question - "Would you like to have mortgage life insurance?" – they often say yes. It is another box ticked and something else has been removed from their plate.
However, with over ten years in the financial industry, I know that that decision can be a costly one. I first read about the costs of Creditor Insurance or bank-provided Mortgage Life Insurance from Bob Aaron. He is a Toronto area lawyer. In an article in the Toronto Star, dated September 11th, 2004, he said that "A recent decision by the Ontario Superior Court emphasizes the importance of having life insurance protection for mortgages, and of arranging coverage with an insurer independent of the mortgage lender”.
In his article, he described the plight of David and Therese St. Louis. They had been referred to a mortgage broker. According to the article, “Therese claimed she and her husband had requested mortgage life insurance from the mortgage broker, and were told that the premium was included in their mortgage payment.”
The Louis’ met with their mortgage broker three times before closing. The broker had indicated that the forms would be sent along with the mortgage documents to their lawyer; and, at that time, they would have to accept or decline coverage in his office. The licensed mortgage broker did not discuss the issue again and the clients believed that they had a policy in place. It turned out that neither an application for insurance nor a waiver of coverage was ever signed by the husband and wife. The clients relied on their belief that the insurance was in place. Consequently, the truth was only discovered at the time of her husband’s death.
In this particular case, the court ruled that, since Therese was not informed in a “clear and accurate way” that no life insurance was in place, she was entitled to rely on her assumption that they did have an insurance policy. Yet, for Mr. Aaron – a lawyer – this was not good enough. He suggested that “lawyers are the last people banks should ask to market their life insurance products”. But he did not stop there, for he also said that “there is a perfectly good licensing program in place for life insurance agents, but the law unfortunately allows mortgage brokers and bank employees with little or no training or experience in the area to market life insurance to borrowers”. Consequently, Mr. Aaron advises his client to obtain a “third-party life insurance policy to pay off their mortgage”.
From my point of view, a separate life insurance product has many advantages. Firstly, it allows the borrower to be in charge. By buying a life insurance policy, the borrower is the owner of the policy and they can choose the beneficiary. However, with a mortgage life insurance policy provided by the bank or mortgage broker, the bank is automatically the beneficiary and they get all of the death benefit. Or put differently, if the borrower wanted a house to be sold at his death, the executor could pay the mortgage with the life insurance until the house is sold rather than paying the bank or other mortgage provider with the entire lump sum of the policy. As a result, thousands of dollars could be saved from the banks and given to the beneficiaries in question.
With that being said, there is another point worth considering. Many homeowners will change mortgage lenders during the time they're paying off their home, especially if they can get a lower interest rate somewhere else. If you take your mortgage to another company, you will lose your mortgage insurance and have to apply again with the new lender. Should your health change, you might not get any coverage. So when you purchase a mortgage life insurance with your mortgage lender you lose control and flexibility.
Finally, consider this: Creditor Insurance or bank-provided Mortgage Life Insurance in Canada are Group Insurance Products. This means an insurance company will create an insurance programme for a collection of people with the same lender. This process can often lead to more expensive life insurance coverage. Additionally, the lender or insurer may cancel a group policy at any time, and that means you could lose your coverage.
All of this means one thing: by buying your individual life insurance policy, you're in control. You are the only one that the life insurance company will contact, if there is a problem. You can search for the best mortgage rate without having to lose your coverage. You are the only one who can change your policy or determine the beneficiary. Just like owning a house, you will be in control of your insurance coverage and that is the first step to financial independence.
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