Often the term “mortgage insurance” is thrown out by banks as a clever way to disguise what in essence is a creditor product with a declining benefit. Mortgage insurance and life insurance are not the same, in fact life insurance has much more benefits to it and holds its value better. Banks often push unsuspecting clients to purchase a product based on their own sales targets rather than what is in the best interest of their clients. It’s also convenient for them to do so while you’re applying for a mortgage with the bank. We have 10 Reasons Why You Should Avoid Bank Mortgage Insurance in Canada, mortgage insurance is not right for everybody, and it is not mandatory. Mortgage insurance in Canada is a declining benefit, it is costly, and lacks the freedom of a life insurance policy.
What is Mortgage Insurance?
Mortgage Insurance is insurance that protects your mortgage lender in the event that you default on your mortgage, which is why it’s also sometimes called mortgage default insurance or bank (creditor) insurance. In Canada, mortgage insurance is required for down payments that are less than 20% of the purchase price. Otherwise, it’s not mandatory. In the event that you do need it, purchasing it with an insurance broker instead of with a bank will provide you with more flexibility with the insurance policy.
Mortgage insurance is specifically designed to protect the lender of the mortgage in the case that the buyer cannot pay off the mortgage (such as death), and will completely pay off the mortgage in that case. This may seem like an ideal product for many new homeowners, but that’s without considering life insurance, and the additional benefits that mortgage insurance with a bank doesn’t offer.
Life insurance isn’t just to help your loved ones cover funeral costs, but can also be enough to cover outstanding mortgages and other financial costs. There are several reasons why having a life insurance policy to protect you has more benefits than a mortgage insurance policy.
Do I Need Mortgage Insurance When Buying a House?
In short no, but depending on your situation and especially your downpayment, it might be required.
In Canada, you will be required to have mortgage insurance if your down payment when mortgaging is less than 20% of the purchase price. If you have a downpayment of less than 20% of the purchase price then this is being it is determined to be a high-ratio mortgage. The term “high ratio” shows the range between the mortgage amount (the loan) and the purchase price (the value).
Otherwise, if your downpayment is 20% or over then mortgage insurance is not mandatory.
Below is our list of 10 reasons why you should avoid mortgage insurance from banks, and consider owning an independent life insurance policy instead.
Reason #1: Post-Underwriting
Although applying for mortgage insurance is much quicker than traditional life insurance, mortgage insurance from banks is post underwritten. This means that they will investigate your eligibility AFTER a claim has been made. You may be paying premiums for years and in the event of a tragedy, your loved ones may discover that you never qualified for the insurance in the first place and will not receive the claim.
With life insurance policies, you’ll always qualify for a claim because they have done the underwriting with your application. Once you’ve been approved for a life insurance policy, you’re guaranteed your benefits.
Reason #2: Cost
Often, mortgage insurance with less features and flexibility actually costs MORE than an independently owned insurance policy. Mortgage insurance premiums are calculated as a portion of your mortgage loan balance and range from 0.60% to 4.50% therefore depending on the amount of your down payment and your loan-to-value ratio, that percentage is determined.
Your mortgage costs go up because mortgage insurance premiums are typically included in the mortgage loan. Although the premium for this insurance is technically paid by your mortgage lender, you still have to pay for it. Although paying the premium in advance is an option, most people choose to include it in their mortgage loan.
Keep in mind, if you buy an energy-efficient home or renovate your existing home to be energy-efficient, you may be eligible for a refund of up to 25% of your premiums. Mortgage insurance premiums are subject to provincial sales tax (PST) in Ontario, Quebec, Saskatchewan, and Manitoba. The PST cannot be added to your mortgage loan and must be paid upfront along with your other closing costs.
Reason #3: Portability
If you buy mortgage insurance coverage from your lender, it may disappear if you refinance. However in the case of a new lender, it will require a new policy based on attained age at that time. Just as you want to avoid depending on your employer’s life insurance coverage in case you change jobs, you should also make sure your insurance isn’t going to vanish just because you found a better mortgage.
While mortgage insurance will disappear if you change lenders, banks, or move houses, a life insurance policy is owned by you: you can keep it if you switch banks, pay off your mortgage or move to a new home.
Reason #4: Named Beneficiary
These are the proceeds if something were to happen to the policyholder. Mortgage insurance plans purchased through the bank automatically pay off your loan no matter what situation your family faces at your death. An individual life insurance policy lets you name your spouse or children as beneficiaries, giving them flexibility to pay off the mortgage when they feel the time is right.
Reason #5: Declining Benefit
As mentioned before, the creditor policy is a declining benefit. Mortgage insurance benefits gradually decline in an attempt to match the declining balance of your debt (declining benefit), and will disappear once you completely pay off your mortgage. Those plans are like a runaway train, you may move into a bigger house with a bigger mortgage, but the death benefit keeps shrinking anyway. Buying an individual life insurance policy keeps you in the driver’s seat, letting you lower the benefits as you see fit or keeping a level benefit for life.
Life insurance benefit coverage stays constant throughout your lifetime or term, and is generally renewable each term. You’ll always get the full face value you first applied for.
Reason #6: Convertibility
An individually owned term insurance policy in most cases will allow the policy to be converted without medical to a permanent (life long) solution. A creditor insurance policy owned through the bank does not provide this benefit, which is especially important if one gets sick and can no longer qualify for coverage.
Reason #7: Preferred Underwriting
An independently pre-underwritten policy allows the insurer to determine if you qualify for “preferred” rates which will lower premiums even further. When applying for mortgage insurance, banks will only ask a few medical questions and base rates off of that information. So even if you’re in perfect health, you’ll pay the same rates as someone who is less healthy for your mortgage insurance.
Reason #8: Consolidation of Benefits
by combining your life insurance with other insurance needs such as income replacement, child care, education, etc, you will benefit from fees saved on multiple policies and tiered discounts (typically insurance companies discount in 250K bands of insurance), along with simplicity of understanding how much coverage you have in one place. With a bank and their mortgage insurance, you can only insure your mortgage, and there are no add-on benefits you can include.
Life insurance benefits typically include:
- Income replacement
- Child care/child term benefit
- Critical illness rider/ terminal illness benefit
- Accidental death benefit
Reason #9: Expertise and Licensed Insurance Professionalism
Most bank staff selling creditor mortgage insurance are unqualified and unlicensed in life insurance. Licensed professionals shop the market to give you the best solution for your needs.
A licensed professional with a focus on selling life insurance policies from various insurance companies is a life insurance broker. A life insurance broker works with multiple insurance providers, giving them more options to find the coverage that’s right for you. A captive agent, in contrast, can only offer you a small selection of life insurance options because they only sell insurance from one company. A life insurance broker is someone who is much more focused on serving your interests than just closing deals. Since life insurance brokers are independent, they are not concerned with winning over a particular business. They also require legal contracts such as the LIRD form, and must be licensed in Canada, which means that they must work in your favour. Working with a life insurance broker is important also because of the fact that there are life insurance scams in Canada, so for your own safety, it is wise to work with a licensed life insurance advisor.
Reason #10: Shop the Market
Buying an independent life insurance policy from a licensed broker allows the market to be shopped to find the best possible solution from a wide range of insurers. Banks often work with only 1 insurance company to provide a singular solution. Furthermore, licensed professionals have a responsibility to sell based on a Needs Based approach and can accurately assess your needs.
Lastly, while looking at life insurance, make sure to consider disability insurance and critical illness insurance in case you become unable to pay your mortgage due to serious illness or injury. In the event that you do require mortgage insurance, consider purchasing from a broker or insurance company for added flexibility that mortgage insurance with a bank doesn’t provide.
Get in Touch With Us, Today!
Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today learn more about both life insurance and mortgage insurance coverage options! We’re based out of Hamilton, and proudly service clients anywhere in Ontario, including Ancaster, Burlington, Dundas, Calgary, and Kelowna. and the surrounding areas.
Frequently Asked Questions (FAQs)
Mortgage insurance is a product sold by banks or through the mortgage broker channel. This type of insurance is referred to as creditor insurance (or credit protection) and is optional coverage, purchased to cover the remaining mortgage balance in case of premature death. It is typically post under written (qualified only if death occurs), a declining benefit with no named beneficiary or ability to port to a new mortgage lender.
Mortgage life insurance covers the remaining mortgage balance only, regardless of the original mortgage amount.
Both mortgage insurance and life insurance cover the balance of your mortgage incase of premature death. However, life insurance is a fixed benefit compared to mortgage insurance which is a declining benefit and only covers the remaining balance in case you die.
Banks and independent mortgage brokers sell mortgage life insurance.
Mortgage insurance, unlike fire insurance, is not mandatory coverage in Canada.
Mortgage insurance premiums are dependent on age and amount of mortgage and can vary drastically.
Although an independently owned life insurance policy is highly recommended instead, having some coverage through mortgage life insurance is better than none at all.
Yes, typically mortgage insurance is no longer available at age 70, compared to a life insurance policy which can provide coverage until age 100 (for life).
No, mortgage life insurance premiums are not tax deductible.
Yes, similar to life insurance policies, mortgage life insurance policies can be cancelled at any time without penalty.
Typically a signed letter of direction with name, date, policy number requesting cancellation is sufficient and can be e-mailed, faxed or mailed to mortgage insurance provider.