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.

 

insurance coverage

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. 

Your income increases or decreases.  

Your family grows or leaves the nest.

Perhaps in the past, you could only afford a standard term policy for 20 years but after learning the benefits of a permanent policy, you would like to convert. 

 A term life policy offers that option.

 Banks

You could probably guess this one so I won’t go into much detail.

 The bank does not permit any changes to the policy.

 

5. Transferability 

 

Life Insurance Company

Got a new mortgage? Moving to a different bank? 

No problem. Term life insurance is portable. It doesn’t matter where your mortgage is since they are not the beneficiary. The term policy is active as long as premiums are paid and thats all that matters.

Banks

When you transfer your mortgage, you also have to redo your mortgage insurance application since they are tied together.  If you have a new health condition when applying for your new mortgage, you should go speak to an insurance agent as they can help find a correctly underwritten policy. Do not risk getting rejected by the bank’s mortgage insurance.

 

6. Price 

I decided to leave price last as the policy’s cost should never be your primary reason to choose a policy. 

 

Life Insurance Company

When buying life insurance, your pricing is based on you as an individual. Your age, career, health etc. are factors. This means if you you are healthy and active, you can be classified as an elite client and be eligible for discounts.

As mentioned earlier, if you are young, healthy and active, a solid term life insurance policy can cost you only $25.00 per month!

Banks

When you buy mortgage insurance, you are entering a group policy which offers no healthy living discounts or preferred rates.  

 

 

Conclusion

 
There are very clear benefits to owning a life insurance policy when compared to a banks mortgage insurance. 

 

1. With a term policy, the underwriting is done upfront and not post death which can really save a lot of grief and stress. 
  
2. The term life policy’s sum insured is commonly much higher compared to a bank’s decreasing mortgage insurance. 
 
3. With term life insurance, the beneficiary can be anyone you choose and they can do what is best for them with the money. Banks on the flip side, insure themselves. The bank is insuring their risk and you are paying the bill.
  
4. Life insurance companies provide the option to convert your term policies into permanent policies while banks do not.

5. If you change your mortgage company, you will also have to redo your mortgage insurance since they are tied together. This opens you up for more potential underwriting issues. 
 
6. Term life insurance offers much better rates for the coverage provided.
 
 
 
So returning to the original question: Should I buy mortgage insurance?

Get a term life insurance policy instead. 

There have been many examples (which you can do your own research on) where families were declined payment because the applicant forgot to mention a minor detail or misunderstood the application question. Had an underwriter gone through the application in the beginning, these unfortunate cases could have been avoided.

 

I hope you learned a little bit and are able to make an educated choice when choosing to proceed with mortgage insurance in the future. If you live in Ontario, I would be happy to create a free life insurance quote for you. Just shoot me an email at filipa@pbnet.ca or go directly to my main life insurance page and fill in the short form. 

Do you currently have mortgage insurance? Will you be switching over? Comment below! 

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Filip Ambroziak

Filip Ambroziak

Throughout his career, Filip Ambroziak had the opportunity to insure a wide variety of unique clients.

From high value homes, to multi-million dollar businesses, Filip has insured it all.

More to explore

Filip Ambroziak

Filip Ambroziak

Throughout his career, Filip Ambroziak had the opportunity to insure a wide variety of unique clients.

From high value homes, to multi-million dollar businesses, Filip has insured it all.

Read More

3 Responses

    1. Hey Kemel, great question.

      First thing, you should never cancel an insurance policy until you have a new one fully activated. That means policy in hand. You don’t want to cancel one policy only to find out your application wasn’t accepted and now your stuck with zero insurance.

      If you currently have mortgage insurance and would like to get life insurance, first get the term policy. Call an insurance agent or broker and have them arrange the coverage.

      Make sure you have sufficient coverage for your situation and only once you have the policy fully processed, go cancel your existing mortgage insurance. You may have a small cancellation fee.

  1. Hey there, first of all thank you so much for this post and honestly I was searching for the same information from last few days. Keep posting and keep sharing. Blogs are very good way of exchanging the information and I love to read post and sometime some blogs give me so much of knowledge and this is one kind of those blogs.

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