Mortgage Insurance is Not Just About Cost
While price is certainly important, it is not the only thing that matters when it comes to mortgage insurance. Here are some other important factors to consider before you buy mortgage insurance.
- Ownership. With standard policies offered by mortgage lenders, you are part of a group policy as opposed to an individually owned policy. When you are part of a group plan, the biggest benefit is the price is driven by averages and the price is set to accommodate a group of unknown factors. As a result, the not so healthy person is likely getting a cheaper rate this route. On the other hand, the individual owned plan will be better suited to someone who ultimately wants to customize the options to their personal situation. In the case of the individual owned policy, you own the policy, you select the plan options and you choose the beneficiaries. With the group, the lender owns the plan and they are also the beneficiary.
- Flexibility and portability. With a group plan offered by a mortgage lender you will only be covered for the amount of the mortgage. As you pay down the mortgage, so does the coverage on the life insurance policy. You will not be able to alter the plan, the coverage or convert the policy to another plan. Ultimately, a personally owned policy is going to give you maximum coverage and flexibility. If you feel you need more insurance coverage for other reasons, you can add it to the personally owned policy.
In terms of portability, it is common for individuals to switch mortgage lenders a few times depending on who is providing the best interest rate. The problem with moving mortgage companies is that you can’t move your life insurance policy with you unless you own an individual plan. You can’t transfer the plan and the coverage ends when the mortgage is paid off.
- Death benefit usage and coverage. Under the group plan, the death benefit is paid directly to the mortgage lender to pay off the mortgage. With a personally owned policy, the death benefit goes to the beneficiaries and they can ultimately decide what they want to do with the money. One example was Rick who inherited money from his mother when she passed away. She had a mortgage and the insurance came through a personally owned policy as opposed to a group plan offered by the lender. Rick got the money from the insurance policy and ultimately decided to use the money to invest in other things. He rented out his mother’s home and had enough interest to cover the remaining mortgage payments because the interest rate was so low. Rick was thankful that his mother had a personal life insurance policy.
- Guaranteed coverage and premiums. The bottom line is a policy owned by the group plan does not guarantee the premiums or the benefits. The policy can be changed or cancelled at any time. With an individual plan, you can establish premium guarantees. As well, you know exactly how much you policy pays on any specific date.
- Health factors. With a group plan, you will pay the same rate as everyone else your gender and your age. As I mentioned, this can work for you if you are not healthy, a smoker or overweight. On the other hand, if you are healthy and you do not smoke, you may have a lot better options with an individually owned policy.
The bottom line
There is no universal rule that can be applied to everyone when it comes to mortgage insurance. Ultimately everyone has unique circumstances and unique situations that require different solutions. As a result, it is not about whether a group insured mortgage plan or an individual plan is better or worse. Rather it is about which is better for you. I always recommend that you talk to a life insurance specialist when it comes to mortgage insurance. They can shop around for the right price, the right product and the best solution to fit your specific needs.