The typical method. Homeowners with a mortgage, and the associated debt, often carry life insurance that was purchased when signing their mortgage papers. The lending institution sells creditor insurance to ensure that the indebtedness would be paid off upon death of the debtor.

Here are several questions for you to ask if you consider buying mortgage life insurance through a lending institution.

1. Are you limiting your life insurance coverage? The lending institution’s life insurance amount is generally limited to the amount left owing on the mortgage as it is paid through its amortization period. Conversely, most people, if healthy, can purchase up to fifteen times their income––usually an amount well over home mortgage debt. For this reason it may be wiser to just increase the coverage on an existing life insurance plan you may own; or purchase your own higher coverage directly from a life insurance company. This can also cover increasing debt resulting from fluctuating lines of credit, credit cards, or home renovation loans.

2. Can you establish the beneficiary? Owning your own distinct policy allows you to designate and/or change a beneficiary who would have the choice of using the money for an alternate purpose, as circumstances require (where a surviving spouse may simply desire to keep a low-interest mortgage). If you own the policy, the death benefit payment is creditor-proof. On the other hand, under creditor insurance only your financial institution collects the proceeds at death.

3. Do you maintain the option to keep your mortgage? If mortgage interest rates are low, and your spouse/partner is the designated beneficiary, he/she would have the option to invest all the life insurance proceeds, or pay off higher interest debt, versus paying off the mortgage.

4. Who will own and control the life insurance coverage? You have no ownership or control over an insurance policy bought only to pay off the debt of a mortgage with one financial institution. Thus, each distinct creditor insurance policy terminates upon repayment of the mortgage, rewriting the mortgage with a different financial institution, sale of the house, or foreclosure.

5. How can I ensure portability of my mortgage insurance? Many people like to shop around for lower interest rates and unique mortgages. An individual life insurance policy may be kept as long as you wish, for portability from mortgage to mortgage among different lending institutions, or for other life insurance needs; such as if you were eventually to have capital gains taxed on your cottage or a second residence at death. This can also be pre-funded when you own your own more permanent policy.

6. Can mortgage insurance be cancelled? Personally owned policies cannot be cancelled by the insurer. However, the creditor insurance may be cancelled upon renewal of the mortgage, especially if one’s health deteriorates. Such a cancellation may mean that you have become an “uninsurable risk” by the next time you renew your mortgage. It is precisely during a health problem that one might choose to increase the mortgage or associated debt (where the home is the collateral in a hybrid type of mortgage with lines of credit, etc.).

7. Can you convert your life insurance to permanent coverage? Unlike creditor insurance, you can convert privately owned term polices to permanent plans if necessary, regardless of health.

8. Will a surviving joint-owner retain coverage? Creditor insurance may cover two parties who jointly mortgage their property. However, it pays only on the first death, even if the two were to die. When one spouse dies, creditor insurance no longer covers any survivors. In contrast, by owning your own insurance, two spouses or partners may each own separate life insurance. In the case where both parties die, double the benefit would be paid, thus adding increased value to the estate. If one survives, the coverage on that life continues.

9. Whose goals are first priority? Creditor insurance is designed to make the lender the only beneficiary. Personally owned life insurance programs can be designed by financial advisors in relation to your own unique goals. For example, an optional living benefit would allow for a terminally ill policyholder to receive an income while alive.

10. Can you avoid future insurance medicals? If one is currently healthy it may pay to take the opportunity today to acquire a personally owned life insurance policy––or increase the coverage on an existing plan––and keep it over time. In this way you can side-step the limited functionality of mortgage insurance offered by creditors. Many group and creditor plans offered by insurance companies are asking for full medicals before initiating the coverage.

11. What about group plans offered at work? Similarly insurance offered by any group benefit plan, especially in light of plant closures, carries the risk that group insurance would be lost at some point. And any plan offered by a bank or a credit card, is actually some form of a group plan with no true ownership, portability, and absolutely no guarantee of long-term continuance.

12. Mortgage insurance may not pay. Claims may be denied when one becomes sick or dies. Some have been denied on the basis of allegations that the claimant lied on the application. Not informing the insurer of a routine visit to the doctor, or not noting a test for high blood pressure, may be enough to deny a future claim for payment. To top it off, the bank employees may not be licensed to sell life insurance, yet they write up applications for important mortgage life insurance. They simply may not understand the importance of a thorough explanation of risks due to not telling all the details of a medical history. And that can spell financial disaster for your misplaced trust.