Most will agree that the decision to purchase a home is often an exhilarating, overwhelming and expensive one. And with repayment timelines (aka: amortization periods) lasting longer than most marriages do these days, it is not a commitment to be entered into lightly. It’s also not surprising that most people choose to protect themselves and their asset by purchasing Mortgage Insurance.
Historically, banks and other mortgage lenders focused on providing purely life insurance to the borrower. The concept was and is simple; “Leave your loved ones mortgage free in the event of your untimely passing.” Makes sense.
As competition in the mortgage marketplace heated up, most lenders ramped up their product offerings by adding options to pay the borrower’s monthly mortgage payments for a period of time in the event of a disability. Even newer to the market came an option to pay off your full mortgage balance in the event of being diagnosed with a life threatening or “critical” illness. Personally, I think these enhancements are great and provide more comprehensive coverage to the consumer.
Did you hear the “but” coming?
The primary problem (and there are several) that I have with the insurance products that mortgage lenders market is the way they are underwritten. Underwriting is the industry term for “checking you out.” More specifically, Wikipedia defines underwriting as “the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage, or credit).” Mortgage insurance sold through a bank or other mortgage lender is considered group insurance. To keep costs under control, these providers access your eligibility to receive their products through asking a series of multi-part, medical questions while finalizing the purchase of your new home. If you answer “no” to all questions, you are approved…to pay the premiums.
The real underwriting happens if you have a claim. That is when your medical records are requested and that is when the issues often arise. If there are any discrepancies between the “No’s” on your application and the information contained in your files, the claim will likely be denied.
Don’t get me wrong. If an applicant intentionally withholds information that affects their ability to acquire coverage, their claim absolutely should be refused. But what about the client who did not realize their doctor had noted their cholesterol was high at their last check-up or who had forgotten that routine blood work that had indicated elevated sugars? Should they have answered “No?”
More importantly, should their widow be left owing a mortgage alone?
In my opinion, a better way to ensure you and your family are protected is to apply for stand alone, individually owned insurance. Whether applying for life, disability or critical illness coverage, you have the option to undergo complete, medical underwriting (and financial, if needed) to give the insurer all the information they need to make you an offer for coverage. Everyone goes into this contractual arrangement with their eyes open, all their cards on the table and no one has to wonder if the benefits will ever be paid out.
Now that really makes sense.