Mortgage Insurance vs. Life Insurance

Many homeowners understand the need to insure their mortgage balance. If something were to happen to them, their family would lose a valuable income. This makes the family’s ability to make their mortgage payment that much more hindered. Insurance allows an individual’s family the ability to pay off the mortgage balance if they were to pass away. Unfortunately, these same homeowners opt to insure their mortgage through their mortgage lender (usually their bank) rather than opting for an individual life insurance policy. While having mortgage insurance through a bank is better than having no insurance at all, opting for an individual life insurance policy instead could be one of the best financial decisions you make. This article outlines reasons you should replace your mortgage insurance with life insurance.

1.) Lower Rates
When comparing the rates of mortgage insurance to a life insurance policy in Canada, you will find that a life insurance policy is usually far less expensive than having mortgage insurance through a lender. Many Canadian banks post mortgage insurance calculators through their website that allow you to calculate how much your monthly premium for the insurance would be. I visited BMO’s website and calculated the cost for a 40-year-old couple with a $350,000 mortgage balance. After inputting some information, I got a quote for $119 per month. Based on the same couple, a life insurance policy would cost only $42 per month for a 10-year term, and $72 for a 20-year term. Over the span of 20 years, opting for a life insurance policy over the mortgage insurance at BMO would save this couple $11,280!

2.) Decreasing Death Benefit
Along with the higher premiums, mortgage insurance also provides you with a decreasing death benefit. When you opt for mortgage insurance, the bank will only pay the outstanding mortgage balance at the time of death; yet, the bank still charges you the same premiums all along. By contrast, with a life insurance policy, your death benefit stays the same throughout the life of the policy. What does that mean? Have a look at the illustration below for the 40-year-old couple noted earlier.

If one of them were to pass away in the 10th year of their mortgage, the benefit they would receive would only be for the remaining balance of their mortgage (which, in this case, is $192,500). If they had opted for a life insurance policy instead, they would receive a cheque for $350,000 from their insurer. In this scenario, by opting for mortgage insurance with their bank, this couple has made a $157,500 financial mistake!

3.) Post Underwriting
When applying for mortgage insurance, you must simply answer a few questions asked by a mortgage broker. It may be simple to qualify, but are you truly covered? When you pass away, the bank will then begin their investigation to ensure that you in fact do qualify for the coverage. You can find many articles and videos online that discuss Canadian homeowners being denied their death claim on their mortgage insurance. Click here to watch the video: “Mortgage Insurance Marketplace CBC.” By contrast, with a life insurance policy, you are underwritten before you gain coverage. This means that you must provide medical requirements to the insurer so that they can assess your health history before they offer you coverage. These requirements may include a blood test, a urine test, medical questions, and reports from your doctor. While it may require a bit of extra time up front, it ensures that your family will not run into an issue when they try to make a claim.

4.) Coverage Extension
What happens if you develop a health issue and can no longer qualify for insurance coverage? A mortgage is a major financial commitment and can take up to 30 years to pay off. However, every time the term comes up and you change lending institutions, you will need to requalify for the mortgage insurance. If you have developed a health issue during this term, you will not be able to qualify for new coverage. With a life insurance policy, there are features that will allow you to extend your policy for a longer term if you do develop a health issue. One feature is the conversion feature. The conversion feature of a life insurance policy allows the life insured to convert their policy to a permanent policy without having to provide medicals to the insurance company. Another feature is the term exchange feature. Under this feature, the insurance company will allow the life insured to extend the term of their insurance policy, again, without requiring the insured to provide medicals.

5.) Locked-in Rates
Oftentimes, individuals will move banks during the lifespan of their mortgage. If this is the case, the new bank will offer rates based on your current age rather than the age you were when time you first took out the mortgage. By contrast, you can lock in your age on a life insurance policy when you first purchase it, and not have to worry about rates changing when you switch banks.

While having mortgage insurance is better than not having insurance at all, remember that there are better options out there. Opting to replace your mortgage insurance with a life insurance policy can be one of the best financial decisions you could make, saving you thousands of dollars over the life of the mortgage. Speak with a licensed adviser to help you with this transition.

Article written by: Mike Castagna