Mortgage Insurance: A good idea or not?

There is one financial product that many people purchase without even remembering they said ‘yes’. It is offered at a stressful and emotional time for an individual or couple who are about to make the biggest purchase of their life. The price seems paltry compared to the mortgage payment they’ve just agreed to, and the answer to the question posed seems like a no-brainer.

The question typically posed is this: “If you were to pass away, would you want to have your mortgage automatically paid off?”

While the majority would have to agree (to minimize financial loss at such a time of emotional loss), few think through what is really being offered – especially when the premium seems so low (often $30-$40 bi-weekly). What most don’t know is that the same coverage via a life insurance policy can come at less than half the cost and provide far more flexibility.

Mortgage Insurance is in fact life insurance. It is unique in many ways though that make it a poor choice for those wanting to ensure their mortgage is paid off at the untimely death of one of the owners. Let’s compare these two products so the next time you’re facing this decision you’ll be better prepared.

The beneficiary of life insurance is whoever you choose – your estate, your surviving spouse, a friend, a charity, your parents or your children. The face value is received without tax, and can be used for any purpose: to care for loved ones, pay bills, leave an inheritance, look after capital gains owing or pay off the mortgage.

The beneficiary of mortgage insurance is the bank where the mortgage is held, so your loved ones never get access to the proceeds – the bank receives it. So, yes the mortgage is paid off, but it might leave survivors with a paid-off house and no financial assets to pay the bills.

The face amount of life insurance is the amount your beneficiaries receive – whether it is $100,000, $500,000 or $1 million and premiums are based on this amount, your age and health. With mortgage insurance the face amount of insurance is the mortgage amount owing, which means you’re paying the same premium for years on a declining face amount. And if you accelerate mortgage payments, your mortgage insurance premiums are buying even less face value.

What makes mortgage insurance even more expensive is that it is typically offered without a physical or blood work. If you are healthy, then you should want to get a physical to make sure you are paying the lowest possible premium. Mortgage insurance premiums are high, partly because rates are based on the ‘average health’ of the age group being insured.

Mortgage insurance payouts are another problem. As is the case with all insurance payouts, insurers will review the details of each individual claim. In the case of mortgage insurance, if the insured had a ‘pre-existing health condition’ that was either not disclosed at the time of application, or just existed at the time of application, the claim may not be honoured. And that is bad news for the surviving family. Premiums over the insurable period were dollars thrown away, and the mortgage is still owed.

Portability is yet another problem with mortgage insurance. If you decide to move your mortgage from one lender to another, the mortgage insurance is automatically cancelled – it doesn’t move with you. With life insurance, there are no such stipulations – once you are accepted, as long as premiums are paid, you are covered.

The last point I will make is this: If you want to cancel one insurance coverage (say, your current mortgage insurance) and replace it with another insurance policy (say, basic term life insurance), DO NOT cancel the first until the second is in place. There is nothing worse than being uninsured for a period, or worse finding out that you are uninsurable after cancelling a policy that may have covered you.

NOTE: Make sure you review the details of all insurance policies carefully, and if you have questions ask them until you are satisfied with the answers. Some insurance companies have different terms and conditions about what is covered and under what circumstances. The above information is for general reference only. Please check with your insurance provider for exact coverage rules and regulations.

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