Term life insurance vs. bank mortgage inurance

As most no doubt realize, banks are expressing a growing interest in expanding their operations into the life insurance business. However, banks have been selling some forms of life insurance for years. If you are buying from a bank, you need to compare carefully how much you are paying, and what you get for your money.

The type of insurance banks have sold for years is called "creditor's insurance". This is typically used to cover any outstanding balance of a loan. The most common form of creditor insurance would be mortgage insurance, used to pay off the outstanding balance of your mortgage should you die. You do not have to buy mortgage insurance to deal with this risk.

If you wish to decline the bank's mortgage insurance, and arrange for your own term policy, you are entitled to do so. There is a common myth that bank insurance is cheaper than what you pay if you buy coverage from a life insurance company. Many are paying too much at the bank and they need to shop and compare prices. There are people who have bought mortgage insurance from banks without realizing that what they bought is a kind of life insurance, ... something they are not even willing to think about otherwise.

Apart from price comparison, there are other differences between a mortgage/creditor life insurance policy through your bank, and your own policy direct from a life insurance company.

Life Insuring Your Mortgage (Loan) - a comparison

With a Life Insurance Company

With a Bank or Trust Company

You purchase an individual policy.

The coverage is under a group policy.

You own the policy - you have complete control over it.

The bank owns the policy - you have no control over it.

You have a premium rate that is guaranteed in advance, the company cannot decide to change it.

The group policy premiums can be changed if the company decides to raise premiums for the group.

You may purchase any amount of coverage. You can simply add the coverage to existing insurance.

The coverage is for the outstanding amount of the debt. As your mortgage reduces, your insurance decreases.

The insurance company cannot cancel your insurance, only you can.

The policy can be cancelled by the bank or by the issuing company.

Your individual policy is fully portable. It is not connected to the mortgage and if you re-finance your mortgage with another bank, you do not need to re-qualify.

The coverage will terminate if you re-finance your mortgage, or if you sell your house, or if you pay off your mortgage, or if the bank forecloses on your mortgage.

You can convert this policy, regardless of your health.

The group mortgage policy is not convertible.

You decide who your beneficiary is. Upon death, your beneficiary will receive the proceeds and your beneficiary decides how and where to use those funds. The proceeds of a life policy are protected from all creditors, including a bank.

The bank is your beneficiary and the death benefit is automatically used to pay off the mortgage, regardless of the wishes or circumstances of your dependents.

If you use level term, and insure both the husband and wife individually then both policies pay benefits in the event of both deaths.

If you and your spouse are both insured on a bank mortgage policy, then only one payment is made in the event of both deaths.

You are buying the coverage from a licensed broker or agent who has been trained to understand your overall need for life insurance and how to integrate that with your total need.

You are buying insurance from a bank employee who is perhaps not licensed and who receives no training in determining your total need for life insurance.

If you become terminally sick, and are laid off work, and are not able to make your mortgage payments, but you are able to make your insurance premium, your policy will pay the death claim.

If you become terminally sick, are laid off work, and are not able to make your mortgage payments then you automatically lose your insurance when you desperately need it to protect your family.

Conclusion

Even if the cost of individual life insurance coverage was higher than that offered by the bank or trust company, it is clear that individual life policies are superior and worth the difference. However, as consumers are usually surprised to learn, you often end up paying the bank more than what you would pay if you purchased directly from the life company.

Some financial institutions have started to offer critical illness protection as well for their mortgage clients. I do not see much reason to expect a radically different situation in that field either. The best advice still is: analyze and compare before you sign for any mortgage insurance policy!

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Frequently Asked Questions

With a Life Insurance Company	With a Bank or Trust Company
You purchase an individual policy.	The coverage is under a group policy.
You own the policy - you have complete control over it.	The bank owns the policy - you have no control over it.
You have a premium rate that is guaranteed in advance, the company cannot decide to change it.	The group policy premiums can be changed if the company decides to raise premiums for the group.
You may purchase any amount of coverage. You can simply add the coverage to existing insurance.	The coverage is for the outstanding amount of the debt. As your mortgage reduces, your insurance decreases.
The insurance company cannot cancel your insurance, only you can.	The policy can be cancelled by the bank or by the issuing company.
Your individual policy is fully portable. It is not connected to the mortgage and if you re-finance your mortgage with another bank, you do not need to re-qualify.	The coverage will terminate if you re-finance your mortgage, or if you sell your house, or if you pay off your mortgage, or if the bank forecloses on your mortgage.
You can convert this policy, regardless of your health.	The group mortgage policy is not convertible.
You decide who your beneficiary is. Upon death, your beneficiary will receive the proceeds and your beneficiary decides how and where to use those funds. The proceeds of a life policy are protected from all creditors, including a bank.	The bank is your beneficiary and the death benefit is automatically used to pay off the mortgage, regardless of the wishes or circumstances of your dependents.
If you use level term, and insure both the husband and wife individually then both policies pay benefits in the event of both deaths.	If you and your spouse are both insured on a bank mortgage policy, then only one payment is made in the event of both deaths.
You are buying the coverage from a licensed broker or agent who has been trained to understand your overall need for life insurance and how to integrate that with your total need.	You are buying insurance from a bank employee who is perhaps not licensed and who receives no training in determining your total need for life insurance.
If you become terminally sick, and are laid off work, and are not able to make your mortgage payments, but you are able to make your insurance premium, your policy will pay the death claim.	If you become terminally sick, are laid off work, and are not able to make your mortgage payments then you automatically lose your insurance when you desperately need it to protect your family.