By Ben Tse for Planswell
If you have a mortgage, loan, line of credit or credit card, it’s good financial planning to have insurance that can take care of your debt if an accident, illness or death prevents you from doing it yourself. But purchasing this type of insurance directly from the bank or credit card company is usually not the best way to do it. Here’s why.
Mortgage Life Insurance
Mortgage life insurance can be tricky because the name makes the decision seem so obvious. Who wouldn’t want to insure their mortgage? On the surface, it seems simple and convenient – you answer a few quick questions and now your mortgage is protected if something happens to you. Awesome, right? Not quite. As the saying goes, “If it seems too good to be true, it probably is.” There are several issues that should steer you clear from mortgage life insurance.
The first issue is post-claim underwriting. This means that you don’t find out if you qualify for your policy until after your claim is made. So, you could pay a series of monthly premiums that ultimately result in no payment.
The second issue is the declining benefit. As you continue to pay off your mortgage, the value of your policy actually declines, even though the premium you pay doesn’t. This means you are constantly paying the same amount for something that is losing value.
The third issue is the lack of ownership and flexibility. With mortgage life insurance, the beneficiary is the bank, meaning you can’t designate a family member as the beneficiary. Also, as the name implies, mortgage life insurance can only be used for your mortgage, which limits your flexibility.
Finally, the questionnaire can be borderline impossible to complete honestly. For example, you may be asked if you have ever been tested for heart disease. If you answer “no,” you could be committing “fraud” if your doctor has previously checked your blood pressure during a regular check-up.
If you want insurance that can pay off your mortgage if you pass away, you’ll be a lot better off purchasing your own term life insurance policy.
Mortgage Critical Illness Insurance
The general idea behind critical illness is sensible. If you get sick and aren’t able to work, critical illness insurance will pay you a tax-free benefit to help you stay afloat financially. However, as we so often see in the financial industry, something good can turn into something not-so-good when you read the fine print.
Think of mortgage critical illness as the equivalent of a fake designer product. Many of the big companies design these policies so that you can only receive coverage for a few select illnesses like heart attack, cancer or a stroke. But, what happens if you come across another illness that removes you from work? You’re out of luck.
Also, there’s basically no flexibility with mortgage critical illness insurance. The ideal critical illness policy should be capable of helping pay off any expenses, including the likely medical expenses needed, rather than being restricted to just paying off your mortgage.
Again, the solution is to say “no” to the bank, and purchase your own critical illness policy that covers lots of illnesses and keeps you in control.
It’s tough to even think about having to continue to pay off debts if anything unexpected happens. This is when creditor insurance seemingly swoops in and saves the day. If you have a credit card, loan or line of credit, your lender may offer you this type of insurance. It’s meant to pay off your debts if you are unable to do so yourself. But if you look closely, many of the issues that we encounter with mortgage life insurance exist with creditor insurance as well.
The issues with post-claim underwriting, the declining benefit, and lack of flexibility and ownership all exist with creditor insurance as well. In addition to these issues, there are other major red flags that should make you say “no” to a creditor insurance policy, including being grossly overpriced.
The alternative is again to purchase your own insurance on your own terms. A good term life policy can cover all of your debts, and a good critical illness policy can protect your finances if you become ill.
So remember: if the company that lends you money offers to sell you insurance as well, stop before saying yes. Get advice from a reputable source (like a PlanPro from Planswell) and make sure you don’t overpay for underwhelming insurance.
Planswell is a financial planning company. Grow your wealth. Manage your borrowing. Protect your assets. Planswell gives you a free plan that ties investments, insurance and mortgages together so you can maintain your lifestyle throughout work and retirement.