Myth Busting: Mortgage Insurance and Life Insurance are not the same

Mortgage insurance (also known as Credit Insurance) is not the same as Life Insurance but I fear that too many consumers don't know the difference. A lot of Mortgage or Credit Insurance is sold by lenders when consumers purchase a home or take out a line of credit. Lenders know how to lend but I question lenders being the right ones to sell consumers insurance. Could it be that one of the reasons that consumers don't know the difference between Mortgage or Credit insurance and Life Insurance is BECAUSE they have purchased it from their lender? I believe that's a good possibility. There are key differences between Mortgage or Credit insurance versus Life Insurance.

Here are 4 BIG ones:

1) Post Claim underwriting That’s the way Mortgage insurance works. But what does that mean? It's all about the timing of the underwriting. Underwriting for mortgage insurance is only done when and if there is a claim. That's referred to in the industry as Post Claim Underwriting What it means is that an individual buying & paying the mortgage or credit insurance may not be considered insurable after a claim gets submitted. It will "depend". Paying premiums but no actual coverage? Yes. It's possible. Risky. Life insurance by contrast is underwritten when you purchase the policy. That's why you will answer medical questions and possibly be asked for a blood or urine test to determine your insurability. Makes sense. Right? Not having complete certainty about whether or not mortgage or credit insurance will payout can really hang a cloud over a financial plan. If you have a very strong heart, Google “Mortgage Insurance Horror Stories” to watch or read some real-life heartbreaking tales of those who experienced a family death only to find out their mortgage insurance claim was denied. Watch the video from CBC marketplace on mortgage insurance vs. life insurance CBC Marketplace - In denial (heartbreaking) CBC Marketplace-in denial.

2) Your family is not the beneficiary of mortgage insurance In all the flurry, stress and paperwork that can accompany buying a new house and taking on a new mortgage, consumers can often fail to notice that their lender did not mention the subject of a beneficiary. That’s because the lender is the automatic beneficiary of the death benefit in a Mortgage or Credit insurance policy. A false sense of security may exist that cash will be made available upon the death of a family member with mortgage or credit insurance. Circumstances can and do vary greatly when an individual dies. Paying off the mortgage may or may not be the best option; cash might be more important.

3) Same Premium Cost but with a declining benefit Most of us understand why there's an increasing premium over the course of a life insurance policy as we age, to retain the same amount of insurance. Intuitively, it makes sense. But that’s not the way Mortgage insurance works. With Mortgage insurance, consumers pay the same (higher) premium even though the coverage or benefit is actually decreasing with every mortgage payment made.

4) Mortgage insurance can't be converted or moved When changing lenders, mortgage insurance does not move with a mortgage. It is not portable like your mortgage might be. Higher rates based on age might apply that need to be factored in. With life insurance there is no need to 'requalify' for insurance and often with a renewable and convertible term policy, it can be converted to a permanent product at any time without a medical exam. These differences are significantly significant.

These are just 4 of the BIG differences between Mortgage/Credit insurance and Life insurance which are too significant to be left misunderstood. Often those purchasing Mortgage or Credit insurance are doing so at a time of much stress, like taking on long term debt. When signing a mortgage, getting a line of credit or taking out a car loan, I suspect many would believe that they will be looked upon unfavorably by their lender if they chose not to take the insurance at the same time. It might have to do with the very serious looking waivers that need to be signed when a borrower declines such options.

The better option for many is real Life Insurance for real Risk Management The vast majority of financial experts agree: Life insurance provides better coverage Life insurance provides more Flexible coverage Life insurance is usually less expensive coverage to reduce the financial risk that occurs when a borrower dies with outstanding debt. The staff that consumers deal with through a lender are not licensed life insurance professionals. So it’s hard not to question…Why are lenders who sell mortgage or credit insurance not trained for the specifics?

Even those with a financial background can fail to double check...or feel pressured I am embarrassed to admit (but will for the greater good), that I found myself in the middle of a credit insurance misunderstanding many years ago when an increase in a line of credit was required as we closed on a house we were purchasing before selling a house we were selling. Here are some of those gory details that took place between us and a Big Bank lender: No information on premiums was provided No health information was requested (See #1 above re: post claim underwriting) Outrageously expensive premiums of varying amounts were added to the line of credit each month.

While I noticed them, I fear others may not have noticed or questioned them. I did. When questioned, our bank manager could not provide any information about the premiums. When I suggested we would move our business elsewhere, she agreed to reimburse and she did so; reimbursing us in varying amounts between $300-$500/month like it was from some sort of petty cash fund. That's an odd and surprising way to gain reimbursement of credit insurance premiums. Getting reimbursed was my main priority at the time, but many questions stay with me even many years later.

Why was proper documentation of the credit insurance not provided initially or after the fact? How were those premiums calculated since they varied over the few months that they were charged? No information whatsoever was provided. How many other consumers are paying outrageous Mortgage or Credit insurance premiums that they have accepted either without question without realizing?

Change is needed but be aware of the BIG differences At minimum, consumers need to be made more aware and made more financially knowledgeable about the differences between Mortgage or Credit insurance and Life Insurance. Your banker knows about banking but often has limited knowledge about mortgage or creditor insurance despite the fact that they are allowed to sell mortgage insurance currently in Ontario.

Mortgage insurance benefits creditors or lenders first whereas life insurance benefits individuals better That's a fact and not a myth. Take time to investigate and learn and connect!