The Controversy
Based on the mechanics of the product, mortgage life insurance is a financial product which paradoxically declines in value as the client-borrower pays more premium to the insurer. In many cases, traditional life insurance (whether term or permanent) can offer a better level of protection for considerably smaller premiums.
The biggest advantage of traditional life insurance over mortgage life insurance is that the former maintains its face value throughout the lifetime of the policy, whereas the latter promises to pay out an amount equal to the client's outstanding mortgage debt at any point in time, which is inherently a decreasing sum. Hence, mortgage life insurance is extremely profitable for lenders and/or insurers and equally as disadvantageous to borrowers.
In addition, lending banks often incentivise borrowers to purchase mortgage life insurance in addition to their new mortgage by means that are on the verge of tied selling practices. Tied selling of a product of self or of an affiliated party, however, is illegal in most jurisdictions. In Canada, for example, this practice is explicitly forbidden by Section 459.1 of the Bank Act (1991).
Finally, mortgage life insurance is not required by law. It is up to the client-borrower whether he or she will opt to protect his or her property investment by an insurance product or not. Similarly, the choice of insurer is completely unrestrained as well.
Because of these suboptimal qualities of mortgage life insurance, the product has been subject to sharp criticism by financial experts and by the media across North America for over a decade. This has arguably led to fewer banks actively advertising this product in the recent years, although many still keep it in their portfolios. However, many critics fail to consider that in many cases where term life insurance is denied for health reasons, mortgage life insurance is still available. As such, mortgage life insurance can cover the biggest expense left by a deceased breadwinner - ie housing costs. Thus, it is simplistic to dismiss it out of hand as disadvantageous to borrowers.
Read more about this topic: Mortgage Life Insurance
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