Should I Buy Mortgage Insurance?

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Is Mortgage Insurance Worth it? 

 

You got the call from your bank that you’ve been approved for a loan. 

You go out and place a bid on your dream home. 

Your realtor calls and says the house is yours.  

You run over to the bank and finish completing all the paper work.  

The bank representative than pulls out a “mortgage insurance” form and asks if you would like your mortgage insured with them in case something happens to you.


What should you do?

 

First, you should ask yourself: What is mortgage insurance?

Mortgage insurance is a product the bank offers to ensure that if the person taking out the loan passes away, the loan will be completely paid. This is different from the CMHC mortgage insurance that homebuyers with less than 20% downpayment must have.  

Well…that sounds pretty good!

The truth is that even if you pass away, your loved ones are on the hook for the balance of the loan. 

Can your family cover the mortgage and other expenses without you? 

When you are finalizing your mortgage, you are dealing with many emotions, making it very easy to close the mortgage insurance sale. You just sign a few forms in addition to the mortgage papers and you’re done. 

Unfortunately, this may not have been in your best interest.   

I will show you a much better option called Term Life Insurance and why you should run to your nearest insurance agent and get it.

 

Why Term Life Insurance is Better Than Mortgage Insurance

 

There are six very important differences between term life insurance and the bank’s mortgage insurance:

1. Underwriting

2. Amount Insured 

3. Beneficiary 

4. Conversion

5. Transferability

6. Price

Lets get into a little more detail. 

 

1. Underwriting

~ This is the most important difference between a term life insurance policy and the bank’s mortgage insurance.~

Underwriting is the process where a company checks all of the applicants information and decides whether they qualify for the policy.

 

 

Life Insurance Company

With life insurance, the company will usually ask for a quick medical evaluation to check the applicants health. Assuming everything checks out, the policy is approved and sent out to the client. Once a policy is approved, the insurance company must honor an insured claim after the incontestability period.

If the applicant has a health issue that is not insurable, or perhaps misrepresented the application, the underwriter will decline to issue the policy. No policy is ever issued and no payments were taken from the client.

Another benefit of knowing whether you qualify for certain policies upfront is that if you know you aren’t eligible for one company, you may be for another. There are life insurance companies who do accept certain medical conditions. The premium may be a little higher but at least you will have actual coverage when it’s needed.

Banks

Banks do their underwriting post-death. 

This means that they can accept everyone regardless of health, but only pay out claims to people who fit their underwriting criteria.

If you provided any information that could be considered false at the time of the application, it could void your entire policy and the claim could be denied. 

There are many examples of families left in terrible positions as a result of post-underwriting done by the banks as shown in this video by CBC. 

 


2. Amount Insured


Life Insurance Company

When purchasing mortgage insurance from a life insurance company, the contract is very simple. You choose the sum you would like insured such as $500,000. This does not change unless you ask for a reduction.

 The premiums are set in advance and also do not change for the duration of the policy. Example: $25.00 per month. Should you ask for a reduction in coverage, your premium will also be reduced. Fair deal.

 Banks

When you get mortgage insurance from your bank, you do not choose the sum. Only the remaining balance of your mortgage is insured.

This means every single month, as you pay down your mortgage, the sum insured decreases. 

So you can assume that your premium is also adjusted to reflect that change… right?

…Nope. Your premium remains the same and is actually subject to change (might increase).

 

Potential Situations

 

Possible Situation 1: Ellenore purchased mortgage insurance from “Bank A” in 2000. She had a mortgage of $400,000 at the time. The premium for this policy was $65.00 per month. 

Ellenore sadly passed away in April 2019. She has been paying the same monthly premium every month for the 19 years. On the month of her passing, her remaining mortgage was only $12,000. The mortgage company did their underwriting check and luckily Ellenore was approved. The mortgage insurance policy covered the $12,000 balance. 

Sounds good right? Well lets see possible situation 2.

 

Possible Situation 2: Ellenore purchased a 20 year term policy for $500,000 in the year 2000 to have enough to cover her mortgage and leave some extra money for her husband John and kids. John was named her beneficiary from the beginning. The monthly premium was also $65.00.

 When Ellenore passed away in April 2019, the life insurance company was immediately notified and began the claims process. No post death underwriting was done as she was already approved from the start. After 19 years of paying the insurance bill, the sum insured has not changed and her beneficiary John received the full $500,000 amount. 

He used the $12,000 to pay off the remainder of the mortgage and invested $288,000. He then divided the remaining $200,000 to his two children.

 

 

3. Beneficiary

The beneficiary in this case is the person/persons selected to receive the life insurance payout.
 

Life Insurance Company

 You are in full control when choosing who will receive the life insurance payment should you pass away.

This is very important. Your beneficiary has many options on what to do with the money.  

They can choose to put it into the mortgage, invest it, pay off other debts or give it to the kids.

The choices are endless. 

Banks

When you take out a policy from the bank, they are automatically the beneficiary. 

 Assuming the life insured passes the post-death underwriting, the bank pays off the remaining balance and thats it. 

 There are no options and your loved ones have no say on how the money is distributed.

 The bank is insuring their own investment and you are paying the bill.

 

 

4. Conversion

 

 

Life Insurance Company

As you journey through life, your needs change.