As a mortgage professional in Hamilton for the past 25 years I try to write on what I would like to know if I were in the same position as my clients. Today I will not write up on low Canadian mortgage rates but I will write on an important topic which affects most mortgages. I will share my thoughts on mortgage insurance as compared to term insurance.
First let’s consider if insurance is required. Without going into great detail, if a spouse or child is dependent on your income, then some form of insurance is a must.
Let’s begin to define what mortgage insurance is. Most mortgage insurance policies are planned with a decreasing benefit over time. Essentially as the mortgage decreases you get paid only what is left on the mortgage. For example, let’s take a $250,000 mortgage and you pass away in 15 years and the balance of that mortgage is $150,000, then the insurance company only pays out the $150,000. As well it pays the outstanding balance to the financial institution. The premiums never change and are averaged over the life of the mortgage. These mortgage policies can be cheaper but the restriction of the funds being paid to the institution, and not to the remaining living mortgagor is un-flexible. The survivor cannot use the funds as he or she wishes.
There are other numerous negatives to mortgage life insurance:
1. They underwrite after a claim is submitted. They can deny a claim based on the underwriting.
2. Mortgage insurance is generally more expensive. If you don’t smoke and are in good health, you may be better off with term life insurance. Thus it provides less perceived value.
3. Benefits are paid to the bank and not the beneficiaries.
4. If you refinance or buy another house in the future you have to worry about your health declining. With term coverage is portable and not attached to the mortgage.
5. With mortgage insurance, the cost remains the same but the benefits decline. With term insurance, costs and benefits are level.
Term insurance can cover a term of 10, 20 or 30 years. If there is a death the amount is paid to the beneficiary who can use the proceeds as they wish. The amount paid out never changes. For example with a half a million dollar policy and the death being 15 years down the road, you still receive $500,000. Term insurance is generally cheaper than mortgage life insurance. The negative to term insurance is the pre medical exam can be cumbersome and sometimes complex.
Mortgage life insurance is very profitable for banks and other financial institutions. It is also profitable for mortgage consultants who earn a commission for their sale. Insurance is a very important aspect to consider when getting a mortgage. Term insurance would be my first choice, but mortgage insurance is simply better than nothing.