If you’re buying a home, already a homeowner, or about to renew your mortgage you might want to consider the advantages and disadvantages of mortgage insurance vs life insurance, because chances are you were sold something called mortgage protection insurance. The rule in Canada is if you are applying for a mortgage with less than a 20% down payment, you need to purchase mortgage protection insurance in order to qualify. This little monthly charge of $50-$150 is something that most people forget about as they treat it like it’s a part of their mortgage, however what they don’t know is that little monthly premium could cost their family hundreds of thousands of dollars in the future. Let’s have a look at why.
Well, the basic definition of a mortgage is that you are borrowing for the amount of the property that you can’t afford to put down. So if you’re purchasing a home for $1,000,000 and you’re putting a 10% down payment, that means your mortgage would be on the 90% remaining, which equals $900,000.
Where mortgage protection insurance comes into play is on the $900,000 mortgage. The less down payment you put towards your property, the more risk the lender faces, and therefore the lender wants to insure that no matter what happens to you that your mortgage payments will not default. That’s what mortgage protection insurance does. In the case you were to pass away during your amortization period, that insurance coverage will cover the remaining of your mortgage, and your family will get to keep the property.
There are options to get extra mortgage protection insurance in the case of a critical illness or disability at work which essentially protects your income, but most standard mortgage protection plans cover you if you were to pass away.
In a nutshell, mortgage protection insurance works like this: You pay a set monthly premium for the duration of your mortgage, and no matter if something happened to you in year 3 or year 23, the lender will cover the remaining of your mortgage as long as you still have the coverage and qualify for the payout.
That sounds like a pretty fair deal though, why would I cancel my mortgage insurance?
It may seem like a fair deal, but let’s have a look at an alternative option to mortgage protection insurance and we will let you be the judge of what to do.
Remember when we said with your mortgage insurance protection plan that you pay a level premium for the duration of the mortgage and no matter where in that timeline something happens to you, the lender will cover the rest of the term of the mortgage?
Well, let me ask you a question. If something happens to you in year 3, and let’s say you have $$950,000 left on your mortgage, how much of your mortgage will the insurance company cover? You guessed right, $950,000.
But let’s say you’re in year 23, and you have $150,000 left on your mortgage, how much of your mortgage will the banks cover now? You guessed right, $150,000.
But what about all the years you have paid into the mortgage yourself? Those premiums you paid, very similar to car insurance, simply vanish with the insurance company.
But if my mortgage balance is going down over time as I’m paying it off, wouldn’t my monthly premium go down over time as well? The answer is yes it should, but the reality is no it doesn’t. As your mortgage goes down over time, you continue to pay the same monthly premium for mortgage protection insurance, even though your mortgage is becoming less of a liability to the banks.
Another thing to consider is when you apply for mortgage protection insurance, there are minimal health and medical questions being asked to the insured. The scary thing about that is if the insured were to pass away during the term of the mortgage, the insurance company can look at the cause of death and if they see any discrepancies in the insured’s health that they didn’t know about, they can deny the claim, resulting in the family losing the house, and their loved one.
Check out this article here to see examples of mortgage insurance claims being denied in Canada.
That definitely doesn’t sound ideal, but what else can I do? I need to protect my mortgage, I can’t afford the risk of not having protection.
We understand. That’s why we’re here to bring awareness to your options when it comes to protecting your mortgage.
Imagine there was a product that was cheaper than mortgage insurance, protected your income in the event of death, disability, and critical illness, had a level premium, the benefit never went down, and instead of the benefit going to the banks it went to your family, so they could decide how they want to pay off the mortgage, and also have hundreds of thousands of dollars from a tax-free benefit left over so they can afford to maintain a nice quality of life if you were gone?
That product exists, and it’s called life insurance.
Before I get into why life insurance can be the best mortgage and income protector, let me highlight what I just said about the death benefit. The death benefit of a life insurance plan can remain the same during the course of the term (or forever) if you choose to keep it that way. So let’s say you get a life insurance plan with a death benefit of $900,000 to cover the initial owing on your mortgage. If you were to pass away at year 23 with $150,000 in mortgage left, your life insurance policy would pay out your family $900,000 tax free, of which they have full control and decision over what to do with it. Compare that to the mortgage protection insurance, where the premiums are also level, but the benefit decreases over time along with that mortgage, and your family doesn’t get to touch a dollar out of the benefit.
Which would you prefer?
Now there are many different types of life insurance policies out there, so we are going to keep it simple and compare the life insurance which is the most similar in terms of functionality to mortgage protection insurance and you’ll be able to compare and contrast the two.
Mortgage protection insurance | Term life insurance | |
Homeowner | Protects the mortgage lender against the debt of the mortgage. | Protects the debt of the homeowner. |
Beneficiary | Payout goes to the lender or insurance company. | Payout goes to the homeowners designated beneficiary. |
Medical qualifications | Minimal at the time of application. | Thorough at the time of application. |
Decision on assuming the risk and paying the claim | Underwriting is done at the time of the claim, meaning the claim could get denied. | Underwriting is done at the time of application, so the claim is guaranteed. |
Amount of coverage | Decreases with the decreasing mortgage. | Can stay the same or be reduced, it is the choice of the policy owner. |
Portability | Coverage applies to the same mortgage, with the same lender, under the same terms. | Coverage can be used to cover any mortgage, any debt, or any purpose chosen by the insured and their beneficiaries. |
Renewal of coverage | Need to renew coverage with each renewal period or change of lender. This can result in higher premiums as the insured is getting older over time. | Premiums remain the same for the length of the term, and no further evidence of insurability is needed to keep the same policy in place. |
Use of coverage | Pays back the lender for the outstanding mortgage. | Pays the insured’s beneficiaries, of which they can choose how to use the benefit. |
Terms | Ends either when the mortgage is paid off or if the homeowner switches lenders. | Ends at the end of the set term. Most standard term insurance plans range between 10-30 years. |
Cost | 2.8% to 4% of the mortgage amount. | Significantly less than mortgage insurance. |
As you can see, there are some key differences when it comes to using mortgage insurance to cover the debt of your mortgage or a life insurance policy. A couple to keep in mind are the cost, the coverage amount, the beneficiaries, the portability, and the overall flexibility that owning a life insurance policy provides.
There’s no doubt that if we are taking on large sums of debt like a mortgage, we need to have a plan in place for the ultimate worst case scenario for if we were no longer around to pay it. We do not want to place that burden onto our families and loved ones, nor do we want to see all our hard work disappear and get eaten up by the banks. Every human wants to leave some form of legacy, and with legacy comes careful planning and procedures.
While mortgage insurance does exactly what it sounds like, protect your mortgage, that’s the farthest it will go in protecting your legacy. But what if you have other debts in your life? Other mortgages? Other loans? What about the tax implications on your assets if they were to get passed on to your loved ones? What about the quality of life that you want your family to live when you’re gone? What about building an asset that creates tax-free, generational wealth?
Those questions cannot be answered with mortgage insurance.While mortgage insurance can protect your mortgage, life insurance can protect your entire life.
We know how difficult and overwhelming it can be to find the right plan that suits all of your needs and desires, and if you are looking for guidance and clarity about how to find the perfect plan, we are here to help. Book a free consultation with one of our Wealth Strategists and secure your future today.
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