Mortgage insurance protects your family if something should happen to you and you are unable to make your mortgage payments. But the mortgage insurance sold by your bank or other mortgage provider is almost never the best value. The better option is buying life insurance from a licensed insurance broker, in the amount of your mortgage. This alternative is usually cheaper, the coverage is more reliable, and your family gets to choose how to spend the money, not the bank.
If you own your home or condo and have a mortgage, you’ve probably been offered mortgage insurance. Heck, you may even have bought it. No doubt, your bank representative sold you on the benefits of protecting your biggest investment, your home, in the event that the worst should happen. Sound advice on the surface.
But if you look at what you actually bought, the amount you’re paying, and how likely you are to ever have a claim paid, you’ll discover that mortgage insurance, in most cases, is a terrible deal for you, and a great one for the bank. The person who sold you mortgage insurance is likely not licensed to sell insurance, so take it from a brokerage that is: You can get better protection, cheaper, by simply buying life insurance. There are several reasons for this, and we’ll illustrate them below.
The important thing for you to know off the bat is that you can cancel your mortgage insurance any time, and replace it with an equivalent life insurance policy from a licensed broker, with no penalty or fees.
Life insurance is cheaper than mortgage insurance
If you’re like most people, your decision on whether to buy something often comes down to price. Well, whatever amount you need to cover your mortgage, you can get life insurance in that amount, and your premium will usually be less than what you will pay to insure your mortgage. Sometimes much less. Get a quote from us today, or from any licensed insurance broker in Ontario, and compare it to what you’re paying the bank.
Your coverage goes down every day, but your premiums stay the same
Maybe you don’t mind paying a little more to the bank to avoid a complicated application process. But when you buy $300,000 worth of life insurance today, you still have that amount of coverage in seven years. If you bought mortgage insurance on a $300,000 mortgage today, in that same seven years from now, as you pay down your mortgage, your premium stays the same, but you’ll only have as much coverage as you need to pay off the mortgage, say $240,000.
You pay premiums, but might not be insured
You may like the fact that you can buy mortgage insurance by answering just a few questions and without any kind of medical examination. What the bank doesn’t tell you is that filling out that short form simply qualifies you to pay premiums. The decision as to whether or not to insure you is actually made after you die, or after you’re diagnosed with a life-limiting illness. In other words, when you try to make a claim.
Check out this CBC Marketplace episode about two couples who paid their premiums, only to be told after they made a claim that they did not qualify for mortgage insurance. In insurance speak, this is called post-claim underwriting. You see, it costs the bank money to do a comprehensive medical exam and then review the results to decide whether or not to insure you. They save that money, collect your premiums, and then only do all that investigation work after the fact, if you make a claim. It probably only took a few minutes to fill out the form at the bank, but if you die and your spouse wants to make a claim, the bank will order your medical records, and could use the smallest mistake on your application to deny coverage. Sure, they’ll return your premiums, but that’s not why you bought insurance in the first place, is it?
By contrast, when you apply for life insurance through a licensed broker like Mitch Insurance, you’ll have to answer more questions about your health history, and will likely be asked to undergo a medical exam before your application is accepted. Of course, depending on what the questionnaire reveals, you could be quoted a higher premium or denied coverage, but at least you’ll know up front, instead of paying premiums for years, only to later discover that you never had insurance.
If you die, the bank gets the money
Say you pay your premiums for 15 years, and you die, and the bank actually decides to pay the claim (which is by no means a slam dunk). Your loved ones never see the money. The bank pays off the amount of the mortgage, and your family gets no choice in how to use the money.
On the other hand, if you have regular term life insurance, the insurance company writes your spouse a cheque, and then they decide how to spend it. Maybe they don’t mind continuing to pay the mortgage monthly. Maybe they would prefer to use the insurance money to pay off higher-interest debt, cover funeral costs, or just for living expenses. With life insurance, your loved ones have the choice.
Get ready for big premium jumps
Any insurance that pays out upon your passing is going to get more expensive as you get older. If you have term life insurance, the premium you pay when you first purchase the policy will go up a little each year to account for the increased risk associated with your age. If you have whole life insurance, on the other hand, you pay more to start, but your premiums never go up.
Banks do it a little differently for mortgage insurance. They price the insurance based on age groups, so you may be in for a big surprise when you cross over into a new group (say when you turn 40), and your premiums go up by 25% or more. That’s a shock your budget doesn’t need.
You have lots of better options
Any way you slice and dice it, the best way to protect the investment you’ve made in your home is to buy term life insurance, in the amount of the mortgage, or more if you’d like additional protection. If you include your mortgage amount as part of a larger whole life policy, the benefits are even greater.
Either way, life insurance is by far a superior, more affordable option to buying mortgage insurance from the bank. One of our licensed insurance brokers would be happy to give you more details on just how much you could save. Call us today!