Why You Need Mortgage Life Insurance
For most Canadian home owners, their mortgage is the largest debt they will ever assume. Ironically, while a lot of them a quick to buy insurance to protect their homes and cars, few of them take time to actually think about insuring their mortgages. It rarely occurs to them who would make their mortgage payments if they get disabled or die. Or whether their estate will have enough assets to discharge the mortgage, or they will have to sell their house to pay off the bank.
A lot of times, homebuyers will take time to shop different banks to get the lowest interest rates for their mortgage, but most won't do the same when it comes to their mortgage insurance. Many will simply accept what their lenders will offer without looking at other options that may offer better coverage for lower prices.
The type of mortgage insurance we are referring to is not the same as the Mortgage Loan Insurance. Mortgage Loan Insurance is usually required when the mortgage is more than 80% of the value of the home. Under such circumstances, the mortgage must be insured through either CMHC or GE Mortgage Insurance Canada Capital. This is often also referred to as hi-ratio mortgage insurance. However, this type of insurance only protects the lender in the event of borrower default. It does not protect home buyers in the event of death or disability. The type of mortgage insurance you need should protect you and your loved ones if something should happen to you or your spouse. It will help pay off your debt in those circumstances.
There are two types of mortgage insurance you can sign up for:
The Lender's Mortgage Insurance
Mortgage Insurance bought from your lender, bank or credit union is usually called the creditor's group insurance. Most of the time, banks or lenders entice their mortgage clients to sign up for their mortgage insurance to protect the bank/lender against loss should the client default. The premium is based on the amount borrowed. The disadvantages to such policies are as follows:
- While you are the certificate holder, you do not own the policy. This means the lender may change the coverage anytime without your consent
- The coverage will terminate as soon as the mortgage is paid off.
- The premium you pay does not change, but as the balance of your mortgage decreases, so does your coverage.
- You are not allowed to choose your beneficiary. The insurance proceeds go directly to the bank if anything happens to you.
- There will be a need to reapply for such insurance should you decide to change lenders. At which point, you may end up paying higher rates as you get older and/or your health condition changes, or you may get declined.
The upside to getting mortgage insurance provided by your lender however, is that it is convenient, with reasonable rates, and you don't have to go through the underwriting process. Most of it is immediate. It is therefore ideal for those who think they will have a hard time getting approved for a "separate" mortgage insurance due to health issues, or other circumstances they may have.
Mortgage Insurance YOU Own
When you directly obtain an individual mortgage insurance policy from an insurer, you are in control of your insurance coverage. You, not the lender, own the policy. The advantages are:
- Your coverage stays the same even if your mortgage balance is decreasing or paid off. If it is the original amount of the mortgage, then you or your beneficiary will get that amount no matter how much is left of your mortgage balance, should anything happen to you.
- You can decide to keep all or a portion of the insurance once the mortgage is paid off.
- You are free to choose your beneficiary. If or when they get the funds from the insurance company, they can freely decide whether to use it to pay off the mortgage, or to invest and use the profits for the monthly payments.
- It is fully portable. You do not have to reapply when you switch your mortgage to another lender and the premiums you pay will remain the same.
- The policy is underwritten based on your circumstances or health condition at the time of application. If you live healthily, your premiums could be much lower and your coverage is better than what is offered by creditor's insurance.
To find out the best type of mortgage insurance for your situation, we highly recommend you speak to a qualfied financial planner or advisor, or a licensed insurance agent. We usually recommend clients, who do not have insurance at the time they sign their mortgage documents, to sign up for the mortgage insurance we offer while they speak with their financial planner or insurance agent about it. This is so that in case anything happens to them, they have coverage. They will have up to 30 days from the time they sign up for mortgage insurance with us to cancel it without getting charged.
