What is Mortgage Insurance?
Your bank or lending institution will sell you mortgage insurance to protect the money they have lent to you as mortgage. In case of your death the insurance company will pay off the balance owing on your mortgage to the bank and your survivors will own the house free of any mortgage. In case of a disability or critical illness, the insurance company will pay your mortgage payments for the benefit period you selected. If you die without owning any insurance, the bank will still need the mortgage payments to be made on the regular basis. If your survivors can’t afford the payments anymore, then the bank can foreclose on you house. Same thing will happen if you become disabled or seriously ill and can make the payment. So it is very important to have some way to protect your family from a financial disaster like that.
How to buy mortgage insurance?
There are two main ways to get mortgage insurance.
- First one is your mortgage lender or banking institution. Your lender will usually try to sell you insurance to cover your mortgage in case of death or disability. They will try to make it a part of mortgage lending process. But in reality mortgage lending process has nothing to do with the mortgage insurance. They want to sign you up for the mortgage insurance because the lending agent is getting commission for selling insurance. The mortgage application has a few medical history questions that the agent will ask and you answer either ‘yes’ or ‘no’. If you answer no to all the questions, they say that you qualify for the insurance.
- Second way and the best way to buy mortgage insurance is to get insurance through a government licensed life insurance agent. Licensed life insurance agent has to go through the proper training and education to sell personal insurance. S/he has the in depth knowledge about the different plans and companies for personal insurance.
What are some of the differences between the lender mortgage insurance and the insurance plan bought from a licensed insurance agent?
There are several differences in the two types of insurance you buy to cover your mortgage as listed below.
- First difference is that the mortgage insurance you buy from the bank is owned by the bank. That means the insurance company will pay the bank any balance owing on your mortgage. Insurance company will not give any money to your survivors but they will pay off the mortgage balance.
On the other hand if you have bought life insurance to cover your mortgage from an independent agent, you will be the owner of that policy. The insurance company will pay the insured amount to your named beneficiaries. Your beneficiaries can decide if they want to pay off the mortgage or not. They may think that they can continue to make the mortgage payment and use the insurance policy proceeds for other purposes. They may want to start a business or they may want to buy another property.
- Next big difference is that the mortgage insurance from the bank is a declining coverage. So as you pay down your principal of your mortgage your insurance coverage is declining simultaneously.
Personally owned policy bought through an independent agent can cover you for the full amount of coverage that stays level and doesn’t decline as you pay down your principal.
- Third difference is that if you if you decide to change the bank and you want to get insurance from the new lender, you may be out of luck because your health may have changed. You may have survived a heart attack or a kidney failure or other medical issue, and you may not be able to honestly answer ‘no’ to all the medical history questions. You may not qualify for the insurance coverage.
Policy you bought from an agent is not affected if you change your lender. Your policy will stay in force no matter what you do with the mortgage. You can even pay off your mortgage balance or you can change your lenders as many times as you need to or even sell your property. Your insurance policy is independent of the bank, or mortgage or the property.
- Next big risk in buying mortgage insurance from your bank is that the person filling your application has a few health related questions to ask you to issue your insurance coverage. But that is not a properly underwritten insurance policy. Your mindset is not focused on insurance at that time, you just want to get your mortgage approved as soon as possible. So in that pressure you may not understand all the medical questions clearly or you may not remember all the details to answer properly. Under those circumstances you may answer no to all the medical questions. The insurance company can decide to investigate deeper by asking for medical history from your doctor after you have died. The doctor has to disclose the details including the chest pain you may have forgotten when filling the mortgage application. In that case insurance company can decline your claim for non-disclosure. That is called post claim under writing.
A properly underwritten application does have a lot of health and lifestyle questions and you may be asked to go through a medical check up by a nurse or a doctor. In some cases insurance company can request some medical reports from your family doctor or other medical facility that you may have visited in the past. That way the insurance company makes sure that they are taking a good risk before they insure you. This is called upfront underwriting.
Another thing to understand about the personally owned
policy is that you can buy any amount of insurance that your financial
situation commands. So it does not have to be limited to just the mortgage
amount. You can add the amount needed to replace your income or extra amount to
cover kids higher education etc. in addition to the mortgage balance.
When shopping for mortgage insurance or any type of personal insurance that can be impacted by your health or life style, it is very important to look for services of a properly licensed and experienced insurance agent. Even better to go to a licensed life insurance broker that deals with multiple companies to shop for the best rates and best plan that fits your needs and budget.