You're buying a house and taking out a big loan to pay for it. Now, the bank is asking whether you want disability insurance.
Wanting to protect your family against a potential future loss of income, you say, "yes." Within minutes, your application is approved and the cost is added to your mortgage payments.
Hold on... was this a good idea?
For lenders, a mortgage disability insurance policy is an easy sell. They suggest it at a time when you're vulnerable and have yet to do any comparison shopping.
And they make you sign a waiver form if you say "no," agreeing not to hold the lender responsible if something bad happens to you.
Most people don't realize that the disability insurance sold by mortgage lenders is markedly different from the policies sold by insurance agents and brokers.
It sounds like a great deal at the time, but mortgage disability insurance can be more expensive and less effective than insurance sold separately.
There are a number of key differences between mortgage disability insurance sold by banks/lenders and disability policies sold by insurance advisors.
Underwriting at the Time of Application
At the time of application, instead of carefully measuring each person's health and lifestyle, the lender simply asks a few basic questions to qualify the buyer up front. In addition, banks will provide a generic group disability insurance that is a one-size-fits-all product. For example, smokers and non-smokers are often lumped together in the same age category. This blended rate results in relatively expensive premiums for healthy people.
Underwriting at the Time of Claim
With mortgage insurance, the lender evaluates if you are eligible to receive your benefits at the time of claim. This arrangement favours the bank and is risky for the consumer as he or she may have their claim denied when they need it. Isn't it better to determine if you are eligible to receive a claim up front, during the application process, as opposed to later when you've lost your income?
If you change banks when your mortgage is up for renewal, you will have to reapply for coverage at the new lender. This means submitting new medical evidence and paying rates based on your current age. Suppose you have been diagnosed with diabetes since you took out your mortgage. Your new mortgage lender will not insure you.
The mortgage insurance you buy through a bank terminates when the mortgage is paid off. An individual policy can be held generally until age 65 (or can continue to pay you for life, in some cases), potentially long after your mortgage has been paid.
With an individual disability policy, you can be covered for all of your income. With bank disability insurance, in the event of an accident or illness that prevents you from working, only your mortgage payments are covered AND ONLY for a two-year period. The bank is now paid for this period, but who is going to pay for all your other expenses in life?
It is noted that mortgage disability insurance can be a useful short-term "top-up" for those individuals already possessing disability insurance through an independent broker.
That said, in general, the banks offer convenience, but individual disability insurance offers greater income replacement coverage, for a longer period of time, portability and flexibility. That's a better deal for you and your family.