Though it may go by many different names, life insurance on the life of a person who borrows money is fairly common. From mortgages to car loans, from lines of credit to student debt, life insurance on the borrower comes in many forms. While it’s a good idea in principle to insure a debt, there are a few things that you need to consider.
We would like to take this space to briefly explain some of the differences in the insurance products available to you.
In general, Mortgage Life Insurance or Creditor Insurance is group insurance offered by banks, credit unions and other lenders (such as auto dealers and furniture stores). The purpose of this is to insure you, and perhaps your spouse, so that in the event of either of your deaths, the outstanding loan balance is paid off. It is a great idea for the lender but it has some limitations and drawbacks for you, the borrower.
For example, paying off the mortgage or the car loan may not be the best use of the insurance proceeds should you or your spouse pass away. Maybe that money could be put to better use elsewhere. Wouldn’t you like the flexibility to decide? With insurance through your lender, you have no choice in the matter; the proceeds are used to pay off the outstanding loan balance. But with an individually owned life insurance policy, the beneficiary can use the proceeds however they see fit.
Another concern with mortgage life insurance is that if you change lenders (i.e. at term renewal or due to a move to a new house) your insurance will expire and you will need to re-apply with the new lender. If your health situation or that of your spouse has changed, it could result in higher-than-expected premiums or even an outright decline of coverage, putting your family at considerable risk. With an individually owned policy you can change lenders or move as often as you like without affecting your coverage and without having to re-apply.
One more thing to keep in mind with insurance obtained through your lender is that generally your premium will remain the same even as the loan balance declines over the years. So you will be paying the same monthly premium for less and less coverage over time. When you have worked hard to reduce your mortgage balance from $150,000 or more to just $25,000, it doesn’t seem right that you are still paying the same amount for your insurance and when your mortgage is fully repaid you will have no insurance coverage.
Having your own individual policy eliminates this problem because your coverage amount stays the same unless you choose to reduce it. As your mortgage balance declines, it just means that you or your spouse would need less of the insurance proceeds to pay off the mortgage, leaving more money to take care of other pressing needs such as income replacement or providing funds for your children’s education.
If all of the above arguments aren’t reason enough to review how you are insuring your mortgage or other loans and lines of credit, consider this: term insurance rates have dropped significantly over the last five to ten years. It is entirely possible that the same amount of coverage that you have now may cost less with a new policy, in spite of the fact that you have gotten older. The other side of the coin is that for the same amount as you are currently paying you might be able to increase the amount of your life insurance coverage, sometimes considerably, by applying for a new policy.
Who we are:
Barry Altman, PEng, CFP
Barry lives in Meaford, having moved here from Elora almost five years ago. He has over 25 years of experience in private business in a number of fields including finance, sales, design and project management of numerous projects in North America, Europe and South America. Barry is a Professional Engineer and a Certified Financial Planner and is associated with Sun Life Financial.
Owen Craig, B.Comm, M.A. Econ.
Owen joined Sun Life in 2008 after spending a dozen years in energy trading. Before leaving Calgary, he was responsible for managing a commodity portfolio worth over $200 million per year on behalf of Alberta consumers. But having grown up in small-town Ontario, he began exploring opportunities to come back this way. When Sun Life approached him about utilizing his skills to develop lifelong financial solutions that work for people, he jumped at the chance to relocate his family to the Georgian triangle.
Note that the information provided in these articles will, by necessity, be general in nature and you should always consult a qualified professional for advice on your specific situation. The opinions expressed are solely those of the authors and do not necessarily reflect those of the company’s we represent. The authors retain all rights to publication.
