Mortgage Insurance
Most Real Estate sales are accompanied by the creation of a mortgage. This gives mortgage lenders an advantage in marketing life insurance policies to protect the family and pay off the mortgage in case the income-earner/insured dies before the mortgage is repaid.
Life insurance to cover mortgages is usually decreasing death benefit term life insurance. The policies frequently sold by banks and mortgage companies are participating policies with dividends payable to the lending institution.
Consequently, there is no attempt by the lending institution to keep premiums to a minimum. The higher the premium, the more likely the dividends will be a significant source of revenue to the lender.
Individual life insurance sales may in fact be less costly to the home buyer, but there rarely any effort to shop the coverage. The convenience of buying the coverage from the lender as part of the overall real estate transaction usually prevents any comparison shopping.
It is illegal for the lender to require the life insurance purchase as a condition for approving the mortgage. The lender is permitted to sell life insurance as long as it is not mandated by the lender.
Our challenge is informing our clients in advance that we can provide mortgage protection at a more competitive price.
Another important point is that when the lender sells mortgage coverage the beneficiary is always the lender. They do not make the spouse the beneficiary. There are some circumstances where it may be desireable to the the spouse be the beneficiary. If the mortgage will not become due and is payable upon the death of the insured spouse, there should be an evaluation at the time of death.
It is advantageous to pay off the mortgage or invest the proceeds so they can earn a higher rate of return than the interest rate on the mortgage.
If the lender has been named the beneficiary this discreationary allocation is precluded.
By comparing premiums, it may be possible to provide level death benefit protection for about the same premium the lender is charging for decreasing term coverage. This could provide additional protection for other debt such as credit card balances or auto loans.