Buying mortgage life policy from lender vs. buying direct
Check that it’s Mortgage Life Insurance and Not PMI
There is some confusion between Private Mortgage Insurance (PMI) and mortgage life insurance. PMI protects the lender in case the borrower defaults in his loan payments while mortgage life insurance is there to pay the rest of the mortgage when the borrower dies so that his family does not have to worry about the loan.
The PMI is usually required by the lender, especially if the borrower can only pay a small percent of the total purchase price of the home as down payment. Thus, to determine whether mortgage life insurance is indeed part of the lender’s offering, you should double check the terms and conditions outlined in the policy.
When you apply for a mortgage it is highly recommended that you buy mortgage life insurance so that it is in place when the mortgage loan is approved.
Where is the best place to get your policy?
In a nutshell, the best place to get mortgage life insurance is the one that can offer you the best deal. That means you need to make some comparison shopping to see what’s out there.
There are basically two ways you can get mortgage life insurance:
- You can get the coverage directly from your mortgage lender. Most of these will offer you mortgage life insurance products from affiliated insurance companies or maybe require you to be listed in their group credit life insurance policy.
- You can get the coverage from an insurance company or through the help of a licensed insurance broker. This would usually be term life insurance coverage.
The question is, should you buy the mortgage life insurance through the mortgage company or direct from the insurance company?
Let’s take a look at the following table to compare (along with the pluses and minuses):
| Through the Lender | Through an Insurance Agent or Buying Directly from the Insurance Company | |
|---|---|---|
| Beneficiary |
Usually, the lender is the named beneficiary. When the insured passes away, the lender receives the sum assured, which is used to fully pay up the mortgage. + The mortgage is protected because the proceeds go directly to the lender. - The family does not get the insurance for their other needs. |
Usually, the policy is assigned to the lender. + The mortgage is protected because the proceeds go directly to the lender. - The family does not get the insurance for their other needs. |
| Policy ownership |
The policy is owned by the mortgage company and is usually a group life insurance policy. + It is easier to get coverage here for those who have health conditions or occupations that may otherwise result in high premium ratings or worse, denial of coverage. + It’s more convenient since you are paying just one provider. - No discounts or lower premiums for those who are in good health. - The mortgage company has the control over the policy. - If you want to transfer the mortgage to another lender or your lender sells your mortgage to another, the mortgage life insurance policy is terminated. Know more about this by reading Switching mortgage life policies. |
The policy is owned by the individual. + You have control over the policy and can make changes as you see fit. - You may need to go through a stricter underwriting process and may need to get a medical exam. |
| Amount of insurance |
Usually, for a decreasing term mortgage life insurance, the amount of insurance is designed to decrease as the mortgage debt decreases. + You only pay for the amount of coverage you need to protect your mortgage. - There is a risk that your cover is lower than the actual mortgage amount. |
The Individual insured has the freedom to choose the amount of insurance he wants. + You have control over the policy and can make changes as you see fit. - The premiums will be more expensive for a level term insurance vs. a decreasing term insurance. |
| Length of coverage |
The length of the cover is usually equal to the length of the mortgage loan. Also, once the mortgage is paid off, the coverage also stops. + You only pay for the amount of coverage you need to protect your mortgage. - Since this is a group insurance policy, the lender may decide to cancel the policy midway. When this happens, you may need to get a new policy. |
The length of the cover is usually equal to the length of the mortgage loan. + The coverage stays for as long as you renew your policy and pay for the premiums. The insurance company may not arbitrarily cancel your policy. |
| Portability |
The policy is invariably linked with the mortgage. So if you decide to refinance or to sell your house and buy another one, the coverage will stop. |
Since this is an individual policy, it is fully portable. It stays with you regardless of the changes in your mortgage status. |
| Convertibility |
Since this is linked with the mortgage as well as a group policy, you can’t convert to a permanent policy. |
You can convert to a permanent policy if you so decide. In most cases, you can do this even if your health condition takes a turn for the worse. |
| Convenience |
You pay for your mortgage life insurance policy together with your mortgage payments, so that’s one less bill to attend to. |
This entails a separate payment from your mortgage payment. |
Latest update: 09.06.2013
Get your mortgage life insurance quote now, fill our form on the right.
Other sites: critical illness cover, lifeassurance.org.