Is Mortgage Insurance A Wise Choice?

So you purchased a home, and with all the things that you had to do to complete the deal, life insurance was the last thing you had on your mind.   Your are in the bank finalizing the mortgage: "What about life insurance?" asks your banker.  "Yeah, we should have that." you respond.  So you and the friendly banker do the paper work and in about five minutes you have all the insurance you need to cover the mortgage.  It is so easy you don't give it another thought.

Convenience and timing of the offer is the reason why so many people purchase mortgage life insurance.   It is a salesman's paradise selling mortgage life insurance to a new home owner finalizing the mortgage on a new home they are dying to get moved into.  "It's like taking candy from a baby."

If you really want to know if mortgage life insurance is a good deal a simple comparison is easy to do.   We will use the example of a couple who are both 36 buying a home with a Mortgage of $250,000.  

Let's start with the price of mortgage insurance.
Let's go to the Scotiabank website for a look - Scotiabank Mortgage Insurance

It provides the rate for coverage for a 36 year old as .20 per $1000 per month based on the mortgage and age at the time of the insurance being purchased.  They offer a 20% discount if two or more people are insured.  So for two 36 year olds it would cost .20/ $1000  x 2 (people) x .80(20% discount) = .32 cents per $1000 in monthly premium.  

This would make the monthly premium 250(000) x .32 = $80 per month.  Add provincial taxes of 3% for a total of $82.40.

If your mortgage is set up as a line of credit, which is a common occurrence these days, the rate for a couple age 36 would be .48 and not .32.  The reason is - the line of credit balance does not necessarily decline as it does in a conventional mortgage and can remain the same for twenty years or more so the rate is higher to compensate for the fact that a borrower may require more insurance then in a conventional mortgage.   We will not use this higher amount in our comparison.
Scotiabank Line Of Credit Insurance

Another common one is TD Canada Trust.  The rates there are a bit higher.   Take a look here TD Mortgage Insurance

The question now is - "How much life insurance could you purchase under an individual policy compared to mortgage insurance?    The following amounts are based on a twenty year term so coverage and cost would remain the same during that 20 year period. 

Drum Roll Please;

If both of you are smokers in reasonable health 

You would get $308,000 coverage       20% More Coverage

If one of you smokes and the other does not            

$412,000        60% More Coverage

If both of you do not smoke.

$635,000        160% More Coverage

If you both in good health and do not smoke.

$657,000        170%  More Coverage

If you were both in excellent health and did not smoke

$930,000         275% More Coverage

This means the bank charges everyone the same rate - the highest rate. 


So we know mortgage life insurance is not a good deal compared to individual life insurance from a price perspective.



Let's press on because price is not the only consideration.  

1.  Your Coverage Declines every time you make a mortgage payment because you owe less and mortgage insurance only covers the outstanding balance of the loan.

Individual coverage does not decline but remains the same.  You decide when and if you want to reduce the coverage.  You are in control.  

2.  What happens if both of you are deceased from a common accident or illness?

Would the bank give your beneficiaries two houses?  No they would not.   They will only pay out the balance of the mortgage.    

 An individual life insurance policy will pay a benefit for each of you meaning your beneficiaries would receive both death benefits.  After all you paid premiums for two people.  

3.  The Bank may increase your premiums at any time?  

The bank can raise the premiums if they want to.  They provide no guarantee as to the cost of the insurance.  In a nutshell - they own the policy - they design the policy the way they see fit - they administer the policy.     

Individual life insurance policies provide 100% guaranteed premiums.  You own the policy.  Your beneficiaries receive the proceeds directly.   The reason you purchase life insurance is to look after the people you care about.     

5.  What happens if you want to transfer your mortgage to another bank?   What happens if I sell my present home and purchase a different one? 

Your mortgage life insurance will terminate.  You will have to reapply, your premium will be based on your present age which will be higher.  If your health has changed you may no longer qualify for insurance coverage.  You will be left without any coverage or the ability to buy it.   

Individual insurance would continue unaffected by any decisions you make in respect to who your mortgage is with.

If you want to re-mortgage your home to take advantage of an opportunity by using the equity in your home,  or move and need a new mortgage on a home in a different city you would have to re-apply for insurance if you have mortgage insurance.   It may not be possible to get coverage again because of your health.  Undoubtedly your premium will be higher because you are older.  Individual life insurance not only locks in your premium, it also guarantees that you will have coverage.  There are just too many things that can go wrong when you do not own the policy and allow someone else to dictate the rules.

6. If something were to happen would you want to find out there is no coverage because you answered a questions wrong? 

The biggest issue with mortgage or debt life insurance from the bank is that they have post claim underwriting, which basically means that the underwriting will be done after a claim has been submitted. Technically you could be declared not insurable after you have submitted a claim (yes after you are dead they will look to see if you qualified for coverage).  

If you purchase term life insurance directly from your insurance agent, all underwriting will be done before the policy is issued. Therefore you know your claim will be paid out when needed according to the terms of your contract.

A good article to read from the Toronto Star about the Feldmans who discovered that mortgage insurance has a number of hidden pitfalls.  Their insurance was denied even though they told the bank everything about their health.  They simply did not qualify according to the bank.  Had they known they did not qualify they would never have paid the premiums with the false understanding they were covered.   
http://www.thestar.com/comment/columnists/article/605987
and you may want to watch CBC's Marketplace
http://www.cbc.ca/marketplace/episodes/2008/02/in-denial.html

Call if you want a no hassle solution that truly meets your needs well into the future.   306-821-1620