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The Truth About Mortgage InsuranceSubmitted by Foundation Private Wealth Management on October 25th, 2013
The decision to buy a house and take on a mortgage is one of life’s milestone moments and it often symbolizes the big step of “getting there” for most families. One of the seemingly insignificant aspects in the process of obtaining a mortgage is the decision of how to insure it, as most people elect to simply opt in to the insurance their lender offers without fully understanding their options.
If you’ve taken out your mortgage with a Canadian bank, in most cases they’ll simply tack on the insurance at the end as an “embedded” cost, when in reality it is a separate product altogether. Furthermore, it is a very poor form of insurance for relatively healthy (insurable) adults as the death benefit is simply the balance owed on the mortgage, which obviously declines as it’s paid off. Despite some misconceptions to the contrary, this ‘mortgage insurance’ is certainly NOT a requirement as there are many other options available to protect your family. Here are some of the drawbacks to using this type of insurance to cover your mortgage:
“Post-claim” underwriting means you may not receive your death benefit.
Unlike the insurance offered through Foundation PWM, where the underwriting is done prior to determining your eligibility for insurance coverage, the bank’s mortgage insurance offering determines eligibility after death. Not only does this add a layer of unnecessary stress, due to waiting or uncertainty about whether a claim will be granted, but it can mean that your claim is flat-out denied in the time of greatest need.
For adults who are insurable at standard rates (or better) this insurance can be very expensive.
Because the policy is underwritten at death, and there are minimal up front questions, the insurer can charged increased premiums; in some cases, more than double an ordinary Term Life Insurance policy.
Premiums on this policy typically increase over time, but the death benefit declines.
The premiums on mortgage insurance are re-evaluated at every mortgage renewal and typically increase each time (as the life insured has aged); however, the benefit declines over time as you pay off your mortgage.
This insurance protects your lender, not you.
When you buy the ‘mortgage insurance’ policy offered by your lender, you are paying to protect them. In the event of a death to the life insured (or one of the lives insured if it is a “joint first-to-die” policy), any insurance benefit will be paid directly to the lender to cover off the balance of the mortgage, nothing more.
There is no flexibility with this type of policy.
As the insurance is tied to the balance of your mortgage and offered by the bank that leant it to you, if you are to switch lenders, the policy is canceled and you’re left trying to figure out what to do at the next lender.
The following video from CBC Marketplace illustrates these issues in a very clear way. It’s an older piece, but the points remain true to this day:
On the other hand, by insuring your mortgage using Term Insurance offered through Foundation Private Wealth Management, you receive the following benefits:
No matter which lender you use to take out your mortgage, your policy goes with you as it is not tied to the mortgage in any way.
As you will name your own beneficiary, that person will receive the death benefit and they will decide, along with the tenets of a legal will, how the benefit will be used. If they elect to pay off the mortgage, they have that ability; but they’re not required to do so.
Death Benefit Never Decreases
Unless a decrease is requested in writing, the death benefit remains the same for the term of the policy. For example, if it’s a 20-year Term Policy with a $500,000 death benefit, that benefit remains in place for the duration of the contract, regardless of the balance on your mortgage.
In most cases, a Term Insurance policy will be cheaper than the bank’s mortgage insurance offering, especially when factoring in the benefit over the life of the policy. Furthermore, if you are in great health and are fortunate enough to be considered for ‘preferred’ rates, the potential for savings is even greater.
Most term policies issued today are convertible, which means they can be changed from a term to a permanent plan, without proving insurability, based on the prevailing rates at time of conversion. This can be a great benefit if the life insured were to become uninsurable, or if additional planning challenges arise, which a permanent policy, like whole life, is better suited for.
In conclusion, when looking at the best way to insure your mortgage, make sure that the product you choose will do EXACTLY what it is supposed to, when you need it most. If you’re unsure about your policy, contact us and we can review your insurance to ensure that you and your loved ones are properly protected.