Most of the time, buying a home requires the buyer to take out a mortgage loan. With this loan, the decision to opt for mortgage life insurance is made. I am often asked if the life insurance offered by the bank is mandatory. In most cases the answer is no. But like everything in life, there are nuances. This article answers that question and tries to help you choose the life insurance policy that’s best for you.
First, the bank cannot force you to take out insurance, even if it is the banking institution that is lending you the money at the time of purchase. On the other hand, there are certain cases where this might be necessary, such as when the customer has serious health problems or very high debts. The loan would then be a big risk for the institute, which would protect itself through your life insurance. If the bank asks for mortgage insurance, you are not obliged to take it out with them. You enjoy the freedom to choose your insurer.
There are two types of life insurance when buying a home. The one that the bank offers us or private life insurance. To fully understand the differences between the two, we spoke to Julia Szekely, Independent Representative and Financial Security Advisor at SFL Gestion de Patrimoine.
Mortgage life insurance offered by the bank
The insurance offered by the bank is often very easy to take out. Just answer a few questions and you’re all set. New buyers sometimes choose this option because of its simplicity and because they are able to do everything with a single institution. However, you should know that with this insurance, the only beneficiary is the bank. Also, the value of life insurance goes down with every mortgage payment you make.
Individual life insurance policies offered by insurers
In the private sector, you choose your beneficiaries and the value of mortgage life insurance is determined regardless of the length of your contract, whether that is 15, 20 or 30 years. You determine the duration of the insurance cover. If your life insurance is $400,000, the person you designate as the beneficiary will receive $400,000 in the event of your death. The beneficiary might decide to use this amount to pay off the mortgage, invest, pay off the debt, etc. It will be his decision as he alone gets the insurance.
With individual life insurance, you also have the freedom to change financial institutions if, for example, a bank offers a lower mortgage interest rate.
The only caveat is that you will need to fill out a much more detailed questionnaire and medical exams may be required before your policy comes into effect.
Advice
- Put insurers in the competition: You can even compare different offers to find the life insurance that best suits your needs.
- Prevention is better than cure: Remember to insure your spouse and children, even if they are financially independent.
- Adopt the chameleon mentality: Your life insurance should evolve with your life.
