Protect Your Mortgage: Mortgage Life Insurance Exposed
Mortgage insurance is a type of term insurance offered by your mortgage lender. The purpose of mortgage insurance is to protect your home and cover your mortgage payments in the case a main income earner dies or becomes disabled. Sounds like a great idea… but it’s not always the best option. In fact, other term insurance policies could be a better fit, and could save you money over time.
WARNING: similar to the extra warranty they try to sell you when you buy a laptop or refrigerator, mortgage life insurance is the “add-on” product that helps to boost the lender’s profits. That’s not to say that insuring your mortgage is a bad thing – it’s actually a smart move. It’s just important to realize that your lender is probably going to offer you an overpriced mortgage insurance product.
Here’s the background information that you need to make sure you don’t get taken for a ride.
What is Mortgage Insurance?
Mortgage Insurance is designed to protect your home ownership in the case of an event, such as death or disability, that makes it impossible to pay the outstanding mortgage value. It is a common add-on service suggested by the bank as home buyers sign off on their new mortgage. The coverage lasts the length of of the mortgage in exchange for premiums paid over the term.
However, mortgage insurance is one-size-fits-all coverage – it is based only on the term of the mortgage, and premiums are not based on factors such as health or family history. This means no discounts are available to those who are in good health, or signing up at an earlier age. Before purchasing any insurance product, it’s important to speak to an insurance expert about the best kind of coverage for your specific needs. A bank employee, while trained to sell the bank’s products and services, will not have the same comprehensive training or resources as a life insurance agent, and may suggest a product that is not suitable for your needs.
Here are a few other ways a mortgage insurance policy differs from traditional life insurance coverage:
Premiums are taxed: Unlike life insurance, which is not subjected to taxes, mortgage insurance premiums are charged PST.
Less flexibility: Mortgage insurance cannot be combined with any other insurance policy you may have. Other insurance types offer options to consolidate a term life policy with other types of coverage, which can lead to saving on a lower rate plan.
It can’t move with you: Bank-offered mortgage insurance cannot be switched to another lender. This means, should you move prior to the end of your insurance term, your coverage can not be transferred to the new property.
Understanding Mortgage Insurance Coverage
Unlike life insurance, mortgage insurance coverage does not stay consistent throughout the term. Because the value of the mortgage decreases as it’s paid off over time, so too does the coverage offered by the insurance as it matches your outstanding mortgage balance. However, the premiums paid remain the same over the entire term. In other words, as your mortgage decreases over time you receive less coverage, but pay the same – not exactly fair!
Another factor to consider is length of your mortgage insurance term, which is only as long as your mortgage term, and not the full amortization of the mortgage. What that means is that if you have locked in your mortgage rate, for say 5 years, your mortgage insurance will only last for 5 years. When you have to renegotiate your mortgage, you’ll have to renegotiate your mortgage insurance as well.
The Bank is the Beneficiary
With life insurance you can select your own beneficiary to receive the death benefit of the coverage.This enables you to prepare specifically for your own unique financial needs, such as providing lost income for your spouse or paying for final funeral costs. Not so with mortgage insurance – should you die during the insurance term, the payout goes straight to the bank to cover your mortgage payments. This covers the bank’s potential losses on your mortgage loan, and while it protects your home, your beneficiary receives nothing.
You Are Only Approved When You Make a Claim
Once you sign up for mortgage insurance you’ll begin paying your monthly premiums. But did you know that the only time the insurer checks to make sure you qualify for the coverage is after you submit a claim? This means that if an unforeseen incident happens – for example, the main breadwinner in your family passes away – the insurance company can deny your claim because you didn’t qualify in the first place, or due to any inconsistencies in your application. This is called post-claim underwriting. Your premiums get refunded, but that’s not the point… you’re still left wondering how you’re going to pay your mortgage.
Alternatives to Mortgage Insurance
An effective way to cover your mortgage commitments (and peace of mind for your loved ones), is to take out term life insurance for the length of your mortgage instead of the add-on product offered by the bank at the time of your mortgage signup.
Here are a few benefits to using term life insurance to protect your mortgage:
Choose your beneficiary: In the event of the policyholder’s death, all funds from the insurance coverage go directly to the beneficiary chosen to do with as they choose.
Coverage remains consistent: Unlike mortgage insurance coverage, which decreases as the mortgage value is paid off, term life insurance coverage is guaranteed and cannot change during the insurance term.
Flexible coverage: Because your insurance is not tied to your mortgage, you have the ability to move to a new property or switch lenders during the term. You can also explore joint term options and consolidated coverage.
Conversion privilege: Most term life insurance policies in Canada have what’s known as a conversion privilege. This allows you to trade in your term life insurance policy for a permanent life insurance policy – without a medical exam. This conversion privilege means you are assured of being able to buy life insurance at healthy rates in the future even if you become uninsurable. These are features simply not found with mortgage insurance.
Other Benefits of Life Insurance
- Discounts are available based on your health and your family history
- Premiums are taxed at a much lower rate
- It’s more flexible – you can change mortgage lenders and take the coverage with you if you move homes or you can convert a term policy into a permanent policy
- Policy terms don’t change and in most cases the policy premiums are guaranteed
Where Can I Get Life Insurance?
Life insurance is available directly from an insurer, or you can use the services of an insurance broker to find the best rates on the market. Check out RateSupermarket.ca’s Life Insurance Comparison Engine to see the best Term Life Insurance Rates in Canada. Click here to compare.
Steps For Getting Life Insurance
Most importantly, remember that the lender who’s offering you mortgage insurance isn’t shopping around to find out if it’s the best rate available. They simply offer you whatever insurance product their institution offers, without regard to price or product benefits.
Take the following steps to make sure your mortgage is protected and you’re getting the best rate:
Compare life insurance rates to the mortgage insurance rates offered by your bank.
Top it Up
Consider buying or topping up an individual life insurance policy to cover your mortgage instead of using mortgage insurance.
Speak to an Expert
Speak to a licensed insurance broker, not just your mortgage lender, to get advice on coverage.Speak to an Insurance Specialist >