Most lending institutions will try to sell you Mortgage Protection Insurance when you sign for a mortgage. What is it and should you buy it?
Basically Mortgage Protection Insurance is life insurance that will pay off your mortgage if you should happen to die. Anyone with a mortgage should seriously consider some kind of life insurance, especially if you have dependents, (i.e. spouse or kids).
Whether you should accept the insurance offered by your bank or whether you should get it from a life insurance company is the big question. There are differences between these policies and you should review them carefully before committing to one policy or the other.
Here are some of important differences:
Post Claim Underwriting
One issue with the Mortgage Protection Insurance offered by some banks is that they have post claim underwriting. This means that the underwriting will be done after a claim has been submitted. Technically, you could be paying monthly premiums only to be declared uninsurable after you have submitted a claim and your claim be denied.
If you purchase life insurance directly from your insurance agent, all underwriting will be done before the policy is issued. Therefore you know your claim will be paid out when needed according to the terms of your contract.
With Mortgage Protection Insurance the premiums will stay the same over the life of the policy, however the amount policy pays out declines with each mortgage payment you make. With a normal life insurance policy your coverage and premiums stay the same during the term of the insurance.
Its important to compare the costs to determine which is the better deal. Although Mortgage Protection Insurance from a bank or other lender is quick and easy to arrange, it could cost more than a term life policy in the long run Getting a quote for both types of insurance is a really good idea.
With most Mortgage Protection Insurance policies, the beneficiary is actually your lender. They will use the insurance proceeds to pay off you mortgage. Not necessarily a bad thing! But what if your survivors need some money for other costs such as your funeral for example?
With life insurance you select the beneficiary and the beneficiaries can use the proceeds for other needs.
In conclusion, it is always a good idea to have enough life insurance to adequately protect you loved ones in case of your untimely demise, however asking questions of your mortgage advisor and insurance provider is a great idea before making that decision.