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Protecting Your Mortgage or Loan

Whether you are purchasing your first home, or renewing your mortgage once again, your bank's service representative will likely encourage you to sign onto their mortgage life insurance plan, which often come with disability and critical illness coverage as well. Rightly, the concept is a good one, as it will not leave your family in debt or homeless because of an unpaid mortgage due to your illness or death. However, the product design may not be what you believe it to be. Asking a few basic insurance questions will perhaps help you better understand what you are purchasing or subscribing to.

Not all credit protection plans are designed equal - they might not even be designed with your interest in mind!

Here are some points that you may wish to consider:

Who owns the policy?

The implication of ownership is important: the owner has control of the policy, chooses who benefits from a claim, and makes decisions on its cancellation and any important changes. 

Who is the beneficiary of the policy?

Who gets paid from the policy in the event of a claim? Is the beneficiary the lender or someone I choose to name?

How much is paid out in the policy in the event of a claim?

Most commonly, policies are either level or declining. Level means that the sum of money paid out in the event of a claim is always the same, no matter at what point in time or how much is still owed on the loan. Declining means that the sum paid out decreases with the amount still outstanding. (For example to secure a loan of $250,000, a policy was purchased for the same amount. At the time of a claim, several years later, only $50,000 is still owed on the loan. A level policy will payout $250,000, the original amount of insurance purchased, while the declining policy will only pay what is outstanding on the loan, i.e. $50,000)

 What happens to the plan when I switch lenders?

 Does my insurance carry on to secure the next loan/mortgage or do I have to take out a new policy? As we grow older, our health changes. If we have to take out a new policy, we always run the risk of paying a higher premium or even have our application declined for health reasons.

 Is my policy premium guaranteed for the duration of my mortgage?

 Some policy contacts reserve the right to increase premiums at the discretion of the carrier or owner (lender). A policy with guaranteed values (premiums and increases) prevents uncontrolled increases and allow for easier budgeting.

Will I be guaranteed a pay-out in the event of a claim?

Whether underwriting takes place before or after you purchase a policy has important implications on whether there is guarantee of a payout in the event of a claim.

Some policies are sold with minimum qualifying health questions (and no underwriting) at the time of purchase.  Underwriting is done at the time of a claim to determine whether you meet certain criteria for the benefit to be paid out; meaning, you might not receive a payout should you fail to meet certain conditions. Payment is not guaranteed even though you have paid your premiums without any default prior to the claim.

If underwriting takes place before a policy is issued, it means that any questions regarding your health or other circumstances has to be resolved prior to the insurance company providing you with coverage. Once the risk is accepted, it is implied that the insurance company has acknowledged that it has taken on the responsibility or liability to pay a claim should one arises. In the absence of fraud or deliberate misrepresentation, payment is guaranteed if you are not in default of your premiums.


Once you have considered the above points on the plan(s) that have been offered, you can draw your own conclusion as to whom you are protecting: your family or the lender.



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