Insurance experts find some products more useful than others.
For example: term life insurance, disability insurance, and critical illness insurance can change your life if you need the policy to pay out.
However, mortgage insurance, accidental death insurance, and some other products fall into a category of “less useful products.” This is because a carefully constructed life insurance plan can eliminate the need for some policies.
For example, let’s take a look at mortgage insurance.
Mortgage insurance is offered by your bank to cover the cost of the mortgage, should one of the mortgage holders pass away. Some banks give clients the impression that they are required to purchase life insurance to protect a mortgage. They are already protected by the mortgage itself, and according to the Financial Consumer Agency of Canada, banks are explicitly prohibited from coercively “tying” the sale of one bank product with another.
Did you know that a term or permanent policy that you may already have in play can cover the requirement?
(And it could be less expensive and have better terms too.)
This interesting 19 minute video reveals that in the end you want to own your life insurance.
In Denial is an investigative report put on by CBC's Marketplace. It discusses non-medical (post claim underwritten) mortgage insurance sold by major Canadian banks to home buyers as a primary method to cover the mortgage liability.
How much do you know about your mortgage insurance?
Why is this? Let’s take a closer look.
1. The mortgage insurance coverage you are buying is being reduced daily
Look at the visual below. The mortgage insurance offered by a lending institution (bank), per its definition, covers only an outstanding mortgage amount. This amount could be $300,000 in the first month, as per illustration below.
But as time passes by, the coverage becomes smaller and smaller as you pay off parts of your mortgage (see the left part of the chart below). Your mortgage insurance premiums do not change, though. As an alternative to mortgage insurance, a simple term life insurance, also shown on the chart, will preserve its full coverage through the entire life of the policy. With mortgage insurance, over time, you pay more for less.
2. Mortgage insurance payoffs Mortgage insurance payoffs are not always high enough
When people think about getting mortgage insurance, they are purely focused on the mortgage, but there are many other home ownership aspects that might drain your money should you not be prepared.
One of them is home upgrades/repairs. These might be required throughout your entire property ownership. No mortgage insurance policy covers maintenance expenditures for your home.
Another important aspect, especially when dealing with condos, are condo assessments and condo deductibles. These are cases where a condominium board runs out of reserve fund money to make necessary upgrades, repairs, or to pay a required insurance deductible in the case of a larger claim. When this happens, condo owners get a “special assessment.” These costs can add up to several thousands of dollars per condo unit and must be paid no matter what.
Mortgage insurance will not leave you enough coverage for those items because it only covers outstanding mortgage debt. Term life insurance, on the contrary, could have enough room to cover all these potential issues. If your partner does not have a high income on his/her own and there is no income loss protection in place, they might have to sell the property to survive.
3. Mortgage insurance often means higher rates than standard term insurance
You will often find that mortgage insurance rates are higher than rates for the identical coverage offered via term life insurance. The reason is that, in most cases, insurers lump together rates for both smokers and non-smokers. That allows them to sell insurance and estimate rates much faster, but on the flip side, all non-smokers pay more.
A standard term life insurance policy considers your health and habits and rewards non-smokers with better rates, as illustrated below. Whole life insurance and universal life insurance will typically have higher rates than term life insurance, but they come with additional benefits and cover policyholders throughout their entire life.
4. Mortgage insurance benefits your bank, not your family
It is not surprising that, in the case of mortgage insurance, the beneficiary is the bank since mortgage insurance only covers the outstanding mortgage balance. However, a term insurance payout goes directly to your beneficiaries, such as to your family members and loved ones, who are free to decide to use the money for multiple purposes: continue to pay the mortgage payment and use the cash for other purposes such college tuition fees, move to a different location, etc.
5. Mortgage life insurance is not transferrable
As we are all aware, it is typical to change lenders at renewal, but mortgage insurance provided by a bank or any other lending institution is not transferrable. This means you need to get a new policy with your next lender, and that could potentially increase your costs. The graphic below illustrates what can happen. As the worst case, you could become uninsurable, negating the opportunity to take advantage of a better mortgage rate.
A term life insurance policy will stay with you for the entire period of its validity (20 years in this example as a Term 20 life insurance policy) without changes in rates.