Have you recently purchased a home or refinanced your mortgage? If so, you have probably opened your mailbox or email inbox to find several offers for mortgage insurance. Many people confuse mortgage insurance with other products, like mortgage default insurance. Before you make a choice, look at mortgage insurance versus life insurance for your protection needs.
There are a lot of good reasons to purchase term life insurance in the first place, as anyone with young children or other dependents knows. Life insurance protects your family and loved ones if anything unexpected happens to you. But it’s not the first thing on new homeowners’ minds when thinking about protecting their new purchase. Maybe they should reconsider – namely term life insurance for mortgage protection.
If you’re in the market for a new mortgage, you have two options to secure your home for your loved ones should something unexpected happen to you. The convenient but expensive option that your lender is suggesting you purchase: bank-offered mortgage insurance. Or, listen to the sound advice of an independent, experienced life insurance broker. Choose term life insurance, a cheaper and better alternative to mortgage insurance.
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Mortgage default insurance is a mandatory insurance policy required when the down payment for your newly purchased home is above 5% but less than 20% of the value of your home. This insurance is offered to protect the lender, in case you as the borrower are unable to make the mortgage payments for any reason. In Canada, mortgage default insurance is currently offered by two entities: Genworth and Canada Mortgage and Housing Corporation (CMHC).
On the other hand, mortgage insurance is a product that you elect to purchase for a very specific reason. What is that you ask?
Mortgage insurance is an insurance policy, generally offered by your lender, that pays off the mortgage should the borrower die, while the principal on the loan is still outstanding. A mortgage insurance policy requires a fixed cost premium payment by the borrower to cover a reducing mortgage debt for the benefit of your lender until the mortgage is paid. With mortgage insurance, the lender is covered – however, it doesn’t fully protect you or your needs. Our experience as insurance professionals shows there are other products that can do a much better job of protecting your mortgage than mortgage insurance.
YES! As mentioned, mortgage insurance entails a fixed cost payment that covers a diminishing mortgage debt for your financial institution until the mortgage is paid. The alternative to mortgage insurance is mortgage protection through term life insurance. It can better protect your investment and the life you’re building for your loved ones.
Mortgage protection insurance is an insurance policy offered by insurance companies that protects the borrower through a term life insurance product. Mortgage protection through term life insurance offers a lot more flexibility than traditional mortgage insurance. Term life insurance can be tailored in a way to make certain that families can pay off the mortgage balance and also provide coverage for many other needs, in case an income earner passes away. Typically, you can choose between a range of terms such as 10-, 15-, 20-, or 30-year term to closely match the length of time you have left to pay off the mortgage.
You would generally buy at least enough mortgage protection coverage to pay the balance of your mortgage. According to this CBC piece, the average Canadian owes about $200,000 on their mortgage, while Statscan says it is closer to $160,000. Either way, in cases like these mortgage protection through term life insurance can make sure that a surviving spouse and children will be able to keep the family home, even if the homeowner dies unexpectedly.
Through term life insurance you have the option to consider a policy with a death benefit larger than your mortgage to cover other such obligations as your child’s education, other debts, and living expenses for survivors. Our handy insurance calculator can help you determine the amount of life insurance you need to protect not just your mortgage, but also life’s other needs.
Sure – there are some small advantages to mortgage insurance; we would be remiss if we didn’t mention them. As it is offered by your lender, you pay for it when you make your monthly mortgage payments – no need to worry about missing it. That said, is this small convenience worth thousands of dollars? Because that’s what you’ll be overpaying for the same amount of coverage over the life of your mortgage.
Another supposed advantage of your bank-offered mortgage insurance – there is no underwriting when you purchase. You qualify instantly without a medical exam. The caveat here is that the mortgage insurance is not a guaranteed coverage and is only underwritten at the time of filing of a claim, so your estate might find out after your death that you weren’t covered as well as you thought or maybe not covered at all. Besides the unfortunate circumstances around an early death, having to deal with the duress of further investigation into that death is stress your loved ones do not need at that time.
When looking at mortgage insurance vs life insurance, always remember that you save money and receive better coverage in the long term if you simply go with mortgage protection through term life insurance. In the case of term life insurance, the underwriting happens when you purchase the policy, so the coverage is guaranteed.
Both life insurance and mortgage insurance pay out cash proceeds that can be used to pay off your mortgage should you pass away. However the similarities end there as both protection products are designed with different use cases.
Life insurance offers a financial cushion for your loved ones that can be used in any way your dependents choose, including to pay off the principal and interest on a mortgage. Mortgage insurance, on the other hand, offers cash proceeds to your bank to pay off the mortgage and thereby protect its loan.
Rather than purchase mortgage insurance, which is designed only to pay off your home loan, consider buying term life insurance in the amount of your mortgage instead. Not only does it offer more flexibility but the costs are also significantly lower and guaranteed.
If you need more help understanding these terms, see our complete guide to mortgage insurance here. If you are good with what these terms mean and want to quickly choose a better option, read on. The best way to determine whether term life insurance for mortgage protection is the better choice is by making a fair comparison.
Mortgage insurance premiums offered by your bank are usually higher than term life insurance premiums. And that’s not all: mortgage insurance premiums also increase periodically with age. So your price is not guaranteed through the life of the insurance offered by your bank.
In the case of mortgage insurance, there is no personalized risk assessment on your life. Therefore while the procedure for applying for mortgage insurance through your bank may appear simpler, it ends up increasing your cost of insurance. Much more work goes into the diligent underwriting of term life insurance, thus the insurance company knows more about the risk of covering you, and is able to give a more accurate and mostly lower price for term life insurance. That also means your benefit is guaranteed with mortgage protection through term life insurance – which is not the case with mortgage insurance.
When you get term life insurance the insurance company guarantees your coverage, independent of any changes in your health or lifestyle choices after the policy has been approved.
Mortgage insurance offered by your bank is not guaranteed for the term of your loan. Any adverse changes in your health can cause your bank to deny you a renewal of your mortgage insurance. Worse still, the underwriting for mortgage insurance is done at the time of the claim and the bank can decline your coverage if they learn that your health was not in line with their expectations at the time of taking the mortgage insurance.
That means if you sell your current home and buy a new one – or if you refinance your home through a different lender, or even if you renew your mortgage with your existing lender – you have to buy a new mortgage insurance policy. The mortgage insurance policy does not move or ‘port’ along with your mortgage. That’s a benefit only available with term life insurance, which stays with you for the length of the term, whether that’s 10, 20, 30 or some other combination of years.
As you pay down your mortgage debt, the amount of the mortgage insurance payout also goes down. Lower mortgage payout must mean lower premiums, you may think. Well that’s just not true – in the case of mortgage insurance, your premium stays the same, even as your coverage reduces.
On the other hand, with term life insurance, the policy amount and premiums remain the same over the policy term. With mortgage protection through term life insurance, the payout would be the same whether it is year 4 or year 24 of your amortization period.
Term life insurance pays out to the beneficiaries of your choice, most likely your family. It serves to protect them when you are no longer around. Mortgage protection insurance isn’t really designed to protect your family. It’s designed to ensure the lender receives their money, and the fact that your family may benefit from paying off the mortgage is secondary.
While you own your life insurance policy, you don’t own the mortgage insurance policy and therefore the use of the proceeds from mortgage insurance are determined by the owner of the policy: the lender. If you should die unexpectedly, perhaps paying off the mortgage isn’t your spouse or children’s first priority. They have no choice with a mortgage insurance policy, but with a term life insurance policy, they can decide on the best use of the proceeds. That might mean using the money for a college education or paying off other debts.
As you can see, term life insurance holds significant advantages. The only minor downside to term life insurance in comparison with mortgage insurance is that the latter is a simpler procedure. When you close on your home, you can arrange for insurance that same day through your bank or lender with no medical exam. Term life insurance requires a bit more information (like your medical history) and effort, but with modern technology enabling many of the steps to be carried out on your tablet or phone, the process should go smoothly and relatively fast.
Want to learn even more about mortgage insurance versus life insurance? And how term life insurance might be the best fit for you and your home? Read our Honest Guide To Mortgage Insurance or schedule a call with one of our licensed brokers and discuss your specific protection needs. Even better: get a free instant quote for mortgage protection with our online tool – you only have to answer a few basic questions to get a clear picture of how it might work for your specific situation.