Hello, everyone! Welcome to my Personal Insurance Information Series.  This series is designed to give you the basic knowledge you need to make informed decisions when purchasing personal insurance.

Heather

What is Creditor Insurance?

Creditor insurance insures a loan.  Mortgages are the most common to offer this, but it is also sometimes offered on car loans. There are several reasons why this is not an ideal type of insurance, but the most important reason is that it may not pay out when it is supposed to. 

You Should Avoid Creditor Insurance

Approval for this insurance is based on a few qualifying questions asked at the time you apply for the loan. It is not underwritten, and therefore not guaranteed to pay out if a claim is filed.  Instead, the underwriting and actual approval process are done at the time of claim (injury, death, or disability depending on the coverage).

It can be a nasty shock to someone who has just lost a spouse and believes their mortgage will be paid off, only to find out that they have been declined.  This is not something you want to have added on to everything else you are coping with after the death of a loved one.  

More Reasons To Avoid Creditor Insurance

Although that seems enough of a reason to avoid this insurance, there are several more reasons that it is far better to own your own policies.  The clearest way to illustrate this is with a direct comparison.  

Creditor insurancePersonal insurance
Lender owns the policyYou own the policy
Lender is the beneficiaryYou can pick the beneficiary
If you default on the payment of your mortgage it is also a default on your insurance payment. If you make your payments, you never lose your coverage.
Your coverage declines with the balance of your mortgage, but your payment does not decline.Your coverage stays at the amount you initially got the policy for.
The policy can get cancelled or go up in price.Your payment stays the same
The policy is underwritten at time of claim.The policy is underwritten before you are approved.
With most lending institutions you need to re-qualify medically when refinancing your mortgage.  This also applies if you want to move to another institution.The policy is not tied to your mortgage in any way.  Refinance, or move your mortgage without insurance concerns.
Protects your debt – i.e. the amount of your mortgage at the time of claimProtects your lifestyle – i.e. mortgage, income replacement, final expenses, children’s tuition, etc.
Loan officers are not usually licensed insurance representatives and cannot, by law, provide you with insurance advice. A licensed insurance representative can go over your insurance needs with you and make sure you get what you need.
Loan officers can be pressured to sell you loan insurance, and you need to check your statements to be sure if you do or do not have it.Licensed insurance representatives follow many rules to be sure we are acting in the best interest of the clients, not ourselves.

Get a Term Life Policy Instead

The personal insurance which is best suited to cover large debts such as mortgages is Term insurance.

Important note

While I do not recommend this type of insurance, it is important to have coverage to cover your debts.  If you currently have creditor insurance, do not cancel it until you have applied for replacement insurance and the representative tells you it is time to cancel the insurance you have.

The fourth article in this series discusses term life insurance, what it is good for and when you should buy it.