CREDITOR'S LIFE INSURANCE

CREDITOR'S LIFE INSURANCE

A RISK MANAGEMENT STRATEGY

Creditor's life insurance is a risk management strategy. The borrower purchases life insurance to cover the outstanding balance of debt for the life of the loan. The two most common insurance products and sources are:

Term life insurance purchased directly from a life insurance company.
"Creditor’s insurance" purchased through the lender.

Lenders continue to expand their operations into the life insurance business, but banks have sold some forms of life insurance for years.

Historically, lenders have sold "creditor's insurance," which is typically a level payment policy with a decreasing value to match the decreasing loan balance. The objective is to be able to pay off the outstanding balance of your loan should you die. This can be accomplished through other life insurance products that give you more flexibility and control. You are entitled to decline the lender's mortgage insurance and arrange for your own term policy.

There is a common myth that bank insurance is cheaper than buying the same coverage from a life insurance company. Some financial institutions now offer borrowers critical illness (disability) protection as well. While an individual life policy may cost a little more than coverage through a lender, it is superior and worth the difference. Maintaining ownership and control of the policy terms, amounts and beneficiaries is always in your best interest.

Apart from price comparison, there are other differences between a life insurance policy offered through your lender, and one offered directly from a life insurance company. The chart below illustrates the differences.

The best risk management strategy is to analyze and compare before you sign for any mortgage insurance policy.

COMPARISON CHART

COMPARISON - LIFE INSURING YOUR MORTGAGE (LOAN)
With a Life Insurance Company	With a Lender
You purchase an individual policy.	The coverage is under a group policy.
You own the policy - you have complete control over it.	The bank owns the policy - you have no control over it.
You have a premium rate that is guaranteed in advance, the company cannot decide to change it.	The group policy premiums can be changed if the company decides to raise premiums for the group.
You may purchase any amount of coverage. You can simply add the coverage to existing insurance.	The coverage is for the outstanding amount of the debt. As your mortgage reduces so does your insurance coverage.
The insurance company cannot cancel your insurance, only you can.	The policy can be cancelled by the bank or by the issuing company.
Your individual policy is fully portable. It is not connected to the mortgage and if you re-finance your mortgage with another bank, you do not need to re-qualify.	The coverage will likely terminate if you re-finance your mortgage, or if you sell your house, or if you pay off your mortgage, or if the bank forecloses on your mortgage.
You can convert this policy, regardless of your health.	The group mortgage policy is not convertible.
You decide who your beneficiary is. Upon death your beneficiary will receive the proceeds and your beneficiary decides how and where to use those funds. The proceeds of a life policy are protected from all creditors, including a bank.	The lender is your beneficiary and the death benefit is automatically used to pay off the mortgage, regardless of the wishes or circumstances of your dependents.
If you use level term, and insure both the husband and wife individually (our recommendation) then both policies pay benefits in the event of both deaths.	If you and your spouse are both insured on a lender's mortgage policy, then only one payment is made in the event of both deaths.
You are buying the coverage from a licensed broker or agent who has been trained to understand your overall need for life insurance and how to integrate that with your total risk management needs.	You are buying insurance from a lender's employee who is most likely not licensed received any training in your total need for life insurance.
If you become terminally sick, and are laid off work, and are not able to make your mortgage payments, but you are able to make your insurance premium, your policy will pay the death claim.	If you become terminally sick, and are laid off work, and are not able to make your mortgage payments then you automatically lose your insurance when you desperately need it to protect your family.