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.
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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.
Want to learn even more about how mortgage protection through term life insurance might be the best fit for you and your home? Read our Honest Guide To Mortgage Insurance for all the ins and outs of protecting your home through term life insurance. Give it a read if you are looking to finalize or renew your mortgage or are applying for mortgage insurance.