Do You Need Mortgage Insurance?
10 Reasons why you should avoid Bank Mortgage Insurance in Canada.
10 Reasons Why You Should Avoid Bank Mortgage Insurance in Canada
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. 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.
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 mortgage insurance 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 a 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.
Below is our list of 10 reasons why you should avoid mortgage insurance from banks, and consider owning an independent life insurance policy instead.
Mortgage Insurance FAQs
Mortgage insurance premiums are dependent on age and amount of mortgage and can vary drastically.
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.
Often, mortgage life insurance with less features and flexibility actually costs MORE than an independently owned insurance policy.
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.
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.
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.
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.
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.
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
Discussed With a Licensed Insurance Professional
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.
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 a mortgage insurance, consider purchasing from a broker or insurance company for added flexibility that a mortgage insurance with a bank doesn’t provide.
Get in Touch With Us, Today!
Contact Protect Your Wealth today to 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, Oakville, Waterdown and the surrounding areas.
Do you have questions about Mortgage Insurance in Canada?
Talk to one of our Life Insurance advisors, today.