Lender's Mortgage Life Insurance, Is It a Good Choice? Rarely!
Getting a new home is such an exiting moment. So exiting that, often, new home owners 
and particularly first time home buyers tend to gloss over the papers they sign and trust whoever they have in front of them handing all these papers to sign. We have rarely met home buyers who thought twice about the mortgage life insurance plan they acquired through their lender. If they did, they would certainly not sign up for it. This may be one of the biggest mistakes home buyers make when getting a new home or when refinancing an old loan. First lest briefly look at the advantages of lender's mortgage insurance plans.
That should be very brief. The only time you should consider a lender's mortgage insurance plan is when you know for sure that you cannot qualify for a policy directly with an insurance company because of a major health issue or other reason. Otherwise, there are no other reasons to take the mortgage life insurance plan offered by your lender.
Why should you not take the lender's mortgage life insurance? It's expensive, inflexible, not really yours, could be a problem with estate valuation, can be an accident only life insurance and more...
Lets look at one problem at a time
Lender's mortgage life insurance is expensive - That is an easy one. Ask your lender for the actual cost of your mortgage life insurance and, if you can, compare apple for apple with a regular life insurance. We say if you can simply because all lender's mortgage insurance plans are decreasing term plan and standard insurance plans are level life insurance plans. What does that mean? Simply, with decreasing term your insurance goes down every year but your payment stays the same. Compare that to regular insurance which stays level for the full length of the mortgage and also prices lower to boot!
Inflexible - Once you get the insurance through the lender, you are stuck with that plan. You cannot convert it to anything else (an important option), you cannot add riders, you cannot adjust the insurance as needed....Truly inflexible.
Not really yours - Most people are not aware of this but when you get life insurance through a lender, you do not get a policy, you get a certificate. A certificate, unlike a standard policy can be canceled at any time by the lender and is not transferable to another loan (if a lender sells your loan - which happens often). Compare that to having your own policy where you are fully in charge. If you decide to refinance the policy goes with you. YOU decide when you cancel the policy, not the lender. Here is a really bad case that has happened too many times. An individual gets their mortgage life insurance through the lender. That same person develops a sickness. The lender decides to cancel the certificate. The borrower has no insurance coverage. Now, we have this poor guy who needs to get his own insurance policy but cannot qualify at good rates or cannot qualify for anything. This poor homeowner ends up with high rates on a mortgage life insurance or no coverage at all. Sad and could have been avoided!
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Could be a problem with estate valuation - That is rarely thought about by borrowers. With lender's mortgage life insurance, the beneficiary is the lender. Now you may think that it is no big deal since the purpose of the insurance is to pay off the loan. Wrong! Particularly, when a borrower got a great interest rate on their mortgage. You want your beneficiary to be a person, not the lender. Your designated beneficiary will be able to keep the insurance out if your estate, will be able to decide whether or not to pay off that low interest loan or invest the insurance money and use that to pay the mortgage payments.
Can be an accident only life insurance - Yes, you read right. Some lender's mortgage life insurance polices will only pay if you die in an accident. make sure to check. Even better, get your own policy with a regular insurance company.
More - You did not think we would cover the "more" one, did you? beyond what we have mentioned above, the fact is, every person has a specific need and by calling someone who deals with many options, you will be able to tailor a plan that will not only work for your present mortgage but also future mortgages and other debts and responsibilities. As any other plans, mortgage life insurance is best when customized.
Bottom line. You need to keep as many choices as you can. Lender's mortgage life insurance dies not offer choices but person mortgage life does and it it is most often cheaper. As we always recommend, ask as many questions as you need to. Getting a great rate on your loan is important, but if you die tomorrow and have the wrong mortgage insurance plan, your great rate will mean nothing if your family looses their home to the bank. be well.
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