I seldom post list-type blogs due to their dry nature, however, I learned in detail today about the Creditor’s Insurance most homeowners have on their life’s largest purchase and it compelled me to share.
To put it simply: banks aren’t fully disclosing all of the details.
Below are the differences between going with the creditor’s insurance that your bank will tell you is a necessity and obtaining your own individual version of it. It’s important to understand what you’re signing yourself up for, and more importantly, paying for, before you do.
Creditors Insurance has the following traits:
1. Pays off only the BALANCE of the mortgage – doesn’t carry any fixed lump-sum payment. If your mortgage is $400,000 in year 1, but you die when it’s at $150,000 in year 10, the insurance will only cover $150,000. Additionally, your spouse/family can’t decide what is done with the money – if there is an incredibly low rate locked in for the next 5-years and the money would be better used for investment purposes, there isn’t really a choice.
2. Premiums are adjusted every 5-years. The original rate is based on your age & amount of coverage at the time of application, however, they are subject to change during the course of the mortgage.
3. Underwriting is at time of claim, meaning that you can pay for insurance for the entire life of the mortgage and potentially get declined upon death. The questionnaire you fill out at the time of application is simply to allow you to pay premiums – they don’t guarantee you any coverage until they’ve underwritten at your death. It isn’t always the case, however, denial is possible.
4. The contract is between the bank and the insurance company – you are simply paying the premiums. If you were to die, the insurance company pays out the money to the bank in order to cover the mortgage, your family will never actually see it.
5. Few banks actually issue insurance on their own, and as such, you are obtaining insurance through a middleman (the bank) when you can just go straight to the source (the insurance company) and get better rates. Obviously, there are profits required by all parties, and by removing one of the blocks, you will find yourself paying less than before for enhanced coverage.
On the other hand, an Individual Life Insurance policy (issued at either 10 or 20-year terms, or whole life, depending on your expected mortgage amortization) looks like this:
1. The payout is the amount determined at the issuance of the policy – if you purchase a 10-year term policy for $400,000, you will be paid out a lump sum of $400,000, regardless of when tragedy strikes. If the mortgage is down to $150,000, your spouse/family is left with $250,000 for other expenses or investment purposes.
2. 10 or 20-year terms will guarantee locked in rates for the entire period – you won’t see any monthly premium changes until you have to renew insurance (at which point your mortgage may already be paid off and you don’t even need too).
3. Underwriting is performed at the time of application – you can be assured that in the case of an emergency you will be covered. This also means that your paid premiums are going towards a justified cause, as you can be sure that the claim will be tended too if needed.
4. The contract is between you and the insurance company – you have direct contact with the premiums paid, the beneficiaries, the contract details, etc. You are the owner of the policy and therefore are in full control of the policy & its specifics. Plus, if there were to be a payout, you have full control over where it goes.
5. You’re dealing directly with the insurance companies, and as such, you have the ability to select the most competitive rate possible. All of the firms are competing for your business, meaning that you can scan the market (or have your insurance consultant do it for you) and find the rate that is most competitive (i.e. cheapest).
You can argue that the entire financial industry is out to get you, however, the proof is in the pudding. Make sure you obtain the coverage needed in the event of a tragedy, it’s better to have it and not need it than to need it and not have it.
You can cancel your Creditors Insurance at any time and switch to an Individual Policy. If you have any questions pertaining to the specifics or wanted to see how your current creditor’s insurance matches up, please reach out to me.