A couple have a $350,000 mortgage and mortgage life insurance at their bank. The personally owned life insurance option was not considered. Is that a good decision?
The bank insurance is creditor group insurance and many people think that it is cheap because it is group. The details are not often fully explained but some are these.
- The policy owner is the bank and the client has a participation certificate.
- There is no underwriting in the beginning so the insurer may deny the claim later if there is a pre-existing condition that does not suit them.
- The bank may cancel the insurance whenever they want and may or may not replace the coverage.
- Future rates are not guaranteed
- In the event of a claim that is paid, it will reduce the mortgage even if that is not in your interest.
- No coverage remains on the other partner after one claims.
With personal coverage,
- You are the owner of the coverage
- Underwriting is done up front and you know your coverage is there
- You may cancel the coverage but the insurer may not
- Future rates are guaranteed
- Your family will get the money and they may pay the mortgage if they wish or use the money in other ways.
- If both die, both get paid. If one dies, the other still has coverage.
The difference is primarily the certainty of the coverage both now and in the future, control over rates and use of the proceeds of a claim.
Maybe not a huge deal, you say.
I say, guarantees are how you control or at least influence the future, but we might honestly disagree on that.
But, price matters. For the premium on $350,000 of coverage, this couple could have $1,000,000 of personally owned, guaranteed coverage each. More for the same price and a much better contract. Or 60% cheaper if paying off the mortgage is the only task.
How dumb is bank loan insurance?
When our children were young, we traveled to hockey or baseball tournaments. A mind game to fight the boredom was to think of words you hear just before something dramatically bad happens. Examples:
- That tire looks good enough
- Here’s a coupon for half price laser eye surgery
- Hold my beer I want to try something.
- Oh look, an orphan bear cub.
The new one, “I would like the bank to provide life insurance on my mortgage.”
The same general idea is true for business loans. Pay attention. We had a client who saved just shy of $8,000 per year and had a better contract.
A death creates difficulties. Use the best available tools to resolve it. That choice is not a bank.
Much more for much less is always worth considering.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772