Tied Selling by Bank

(Guest post by Therma Solaris co-founder and COO Patrick Trahan)

As a young entrepreneur, every dollar counts so that is why, when I bought my first home, I was shocked to learn that people I thought I could trust (in this case my local bank) steered me in the wrong direction. Let me explain.

We got a $196,000 home mortgage in January 2011. The bank automatically added their Loss of Life Protection/Health Crisis Prevention/Disability Protection (LOLP/HCP/DP) plan at an additional cost of $105.66 per month. As their site says, “This protection plan can pay off the principal and interest left on your… mortgage up to $500,000.” The monthly payment ($105.66) is a huge additional cost given that my monthly mortgage is under $1,000 (it increases my payments to the bank by more than 11%).

We managed to cancel this plan after the very first charge. We opted instead for simple life insurance for myself and my partner which cost (for $200,000 worth of coverage):

$11.43 (her) + $16.83$ (me) = $28.26/month

So we get more protection for a quarter of the cost. How come it’s more? Remember, the bank’s insurance only covers outstanding principal. So heaven forbid anything happens to either of us but if it did on the third anniversary of our mortgage, the outstanding balance would not be $196,000 but around $179,000. So the policy we are paying four times more for would pay out $179,000 while the less expensive life insurance would always pay out $200,000. It will only get worse over time.

On top of all this, we added home insurance (fire, flood, coverage for all our musical instruments as well) for $62.17. So now we pay about $90.43 per month, but get we get more and frankly better protection.

What a rip-off!

Patrick Trahan
Chief Operations Officer
Therma Solaris
ptrahan@thermasolaris.com
www.thermasolaris.com

ps. here are my calculations:

Mortgage    $196,000     ($937.99)    3%    25    yr
Insurance ($105.66)         11.3% of mortgage payment      

PPMT                                                                                                             1    ($5,375.86)           
2    ($5,537.14)           
3    ($5,703.25)           
Total        ($16,616.25)           

Balance    $179,383.75                
E&OE