What is mortgage creditor insurance?
Mortgage creditor insurance is designed to protect you and your family from the sudden critical illness or death of one of the family members that results in the inability to continue paying your monthly mortgage payments. Upon a sudden critical illness or death of the insured, the insurance will pay off the remaining balance of your mortgage. This will protect your family from potentially losing the property or being forced to sell it.
There are two general types of mortgage creditor insurance:
The first is typically a life insurance policy provided to a borrower by an institutional lender (lender's mortgage creditor insurance)
The second is a life insurance policy provided to a borrower through a third party that is not affiliated with the lender
Both types of mortgage creditor insurance are designed to pay the institutional lender upon the death of the insured.
Lender’s Mortgage Creditor Insurance
The lender's mortgage creditor insurance is obtained by the borrower from the lender, usually at the moment when you apply for the mortgage. This type of insurance has a few benefits for the borrower/insured person.
Lender’s Mortgage Creditor Insurance Benefits
The insurance premium is included in the monthly mortgage payments, so you pretty much don't see it.
This is a group policy. This means that all borrowers are lumped together and have the same premium rates. For example, smokers and non-smokers are combined in the same category, meaning the premiums are not adjusted for factors that may affect the borrower's health.
The lender's mortgage creditor insurance type of insurance is post underwritten. This means the borrower does not have to provide much medical information and the insurance company will not check your medical records at the time of obtaining the insurance. Usually, all you have to do is answer 3 to 4 basic health questions about your past health issues. If you answer "No" to all questions, you are automatically approved. If you answer "Yes" to any of the questions, you would be required to supply additional information. Then the lender will decide on the next steps. If the case the insured person dies, the insurance company will review how those questions were answered and research the borrower's past medical records. If the insurance company finds that all questions were answered correctly, it pays off the mortgage balance. If, however, it finds that any of the answers are not accurate, it may decline to pay.
Lender’s Mortgage Creditor Insurance Risks
If you decide to switch lenders at some point (may happen when your mortgage term ends and you have to refinance), you will have to reapply for insurance with the new lender. This could result in higher premiums due to increased age and/or changes in your medical condition.
Lender’s Mortgage Creditor Insurance is often referred to as declining term insurance. This means that the amount of coverage (the money the insurance company will pay) declines over time as the outstanding balance of the mortgage is repaid by the borrower. However, the premiums remain constant for the term of the mortgage until you refinance the mortgage with a new lender.
Mortgage creditor insurance will expire when the mortgage is paid off or when the borrower reaches 70 years of age, resulting in a loss of coverage for the policyholder.
Finally, mortgage creditor insurance has only one beneficiary: the lender. This simply means that whatever the financial needs of the survivor(s), the insurance pays the lender, not the surviving family member(s). Thus, even if at the time of the death of the insured person, his or her family is in dire need of cash to pay other expenses, they cannot use the money from the insurance as it all goes to pay off the mortgage balance.
What is Life Insurance?
There are 2 types of life insurance: term insurance and whole life insurance. The term insurance is set for a number of years. After the term ends, the insurance comes up for renewal.
Whole life insurance requires the insured to make payments for a set number of years. However, the coverage continues for the entirety of the policyholder’s life. This insurance is often more expensive than term insurance.
In this post, we will discuss term insurance as it is similar to mortgage creditor insurance for an accurate comparison. The whole life insurance is very much different from mortgage creditor insurance.
Term life insurance is a policy purchased by an individual that will pay his or her beneficiaries in the event of the death of the insured. It is designed to replace the total financial value of the person who passed away. Thus, coverage is normally related to all income this person would have brought to the family over the time of their life. This is different from the lender’s mortgage creditor insurance which covers debt.
Life insurance can only be obtained through a licensed life insurance broker or agent. In order to obtain this type of insurance, the insurance company will go through the full process of pre-underwriting. This means that before it issues your insurance and defines your premium, it will examine your health records. The individual policyholder must go through a health questionnaire that allows the insurer to determine if coverage is warranted and to set the premium based on the individual, not a group.
As this type of insurance is pre-underwritten, the claims and disbursement of the money are done much quicker.
Life insurance is not set to just paying off your current mortgage. You are free to take it for any amount based on your unique situation. Also, as opposed to lender’s mortgage creditor insurance, with life insurance your coverage does not decrease over time.
Life insurance has level premiums that are valid for the term of the policy and the amount of coverage remains constant. When the policy comes up for renewal the premium will be adjusted for your age and health conditions.
Mortgage Creditor Insurance vs. Term Life Insurance Comparison
The below table represents the differences between creditor insurance and term life insurance.
| Mortgage Creditor Insurance | Term Life Insurance |
|---|---|---|
Underwriting | Post-underwritten | Pre-underwritten |
Convenience | Quick and easy to qualify | May require medical investigation, lengthening the process |
Portability | None - have to get new insurance with a new lender | Independent of a lender - it carries through regardless of the lender |
Amount of Initial Coverage | Limited to the amount of mortgage | You determine |
Protection on default/illness | If the borrower defaults or cannot make his or her mortgage payment, the insurance will cease as the insurance is tied to the mortgage payment | As long as the insured can pay the insurance premium, the insurance will continue, regardless of whether the mortgage payment cannot be made. |
Amount of Continuing Coverage | Decreases over time as you pay off your mortgage | Constant |
Insurance expires | When the mortgage is paid or upon transfer to a new lender | At the end of the term determined by you |
Beneficiaries | Lender | Named by the insured |
Number of Death Benefits | One, the outstanding balance of the mortgage | If two homeowners are insured and there is a common disaster where both are killed, two death benefits are paid. |
Speed of Claim Payment | Can take up to several months due to insurer investigation | Paid within days |
In summary, the general consensus is that term life insurance is a better option for the borrower than mortgage creditor insurance for several of the reasons noted above. However, it all depends on your unique situation. If the mortgage borrower family is confident that upon the sudden death of one of their members they would be OK with just paying off the mortgage, then the mortgage creditor insurance is enough. However, if the family would struggle to meet their monthly expenses beyond the mortgage payments, life insurance is a way to go.