Why is mortgage insurance so expensive?
Mortgage insurance is typically provided by lenders and does not include a medical underwriting process when first approved. Without an underwriting process, additional costs are assumed and leaves you (the insured) with higher monthly premiums. A term life insurance policy can offer more flexibility and save you money through an insurance company’s more robust underwriting.
Buying a new home or investing in property is a big deal. For starters, the down-payment can rise to tens – if not hundreds – of thousands of dollars, depending on your chosen location. Add to that the time invested in checking out properties and finalizing the sale. But for most Canadians, it doesn’t end here. Over 88% of Canadian homeowners aged between 25 to 44 hold a mortgage with a median size of $200,000.
That said, once the mortgage is signed off, all you need to do is move in, buy some new furniture, and turn the walls into a loving home. Or, is it?
When buying a mortgage, your lender might run terms like ‘mortgage insurance‘ or ‘mortgage default insurance’ by you. They might pose you with questions regarding your family’s future and the safety of your property. After all, no one wants to lose out on their home due to unforeseen reasons, right? But before you sign up for expensive mortgage insurance premiums, take the time to understand how it works and why mortgage insurance is so expensive.
Mortgage insurance 101
Also known as mortgage life insurance, this is a specialized financial product offered by banks and private insurance companies to new homeowners. In case you, the borrower, die before the mortgage is paid off, this insurance product covers the pending payments to keep your family house safe. It’s a safety lock in place to protect your property investment and keep your dependents from becoming homeless.
Unlike a regular life insurance product, your beneficiaries will receive no death benefit or payout. With mortgage life insurance, only the outstanding mortgage is paid off by the insurer. While a few plans do include claim benefits for the beneficiaries, most policies only cover the lender.
Mortgage insurance comes with a fixed cost premium that is usually rolled into your mortgage payments. The premiums will remain fixed throughout the tenure of the debt until the mortgage balance is paid off. The eventual payout will continue to reduce over the years as your mortgage debt decreases but the premiums will remain the same. In some lender-option products, the premiums can even get more expensive as you age.
So, why are mortgage life insurance premiums so expensive?
Why mortgage insurance is so expensive
As mentioned, mortgage life insurance is usually provided by the lenders themselves. Bundled along with the mortgage payments, the entire mortgage insurance process is streamlined. There’s no need to shop around for a new insurance provider or assess different schemes. This convenience is the biggest selling point for lender-based mortgage insurance.
Another point here is the absence of any underwriting. Mortgage insurance requires no medical checkups or detailed underwriting. This allows those with poorer health to get insurance instantly. But the lack of a medical checkup doesn’t mean that coverage is guaranteed. The insurer holds the right to change the terms of coverage or deny any benefits if the health of the insured declines.
Without medical underwriting, insuring your life is much riskier, and in turn more expensive. The mortgage insurance provider passes those extra costs onto you, thus mortgage insurance is much more expensive than medically underwritten life insurance.
So, before you sign up for mortgage life insurance ask yourself – are the additional monthly premiums worth it? And if they aren’t, is there a better product out there that offers you the same mortgage coverage with more flexibility and benefits?
What is the alternative to mortgage insurance?
Term life insurance provides coverage across a specified length of time. If the insured person dies during the term, a fixed, tax-free payout is released to the beneficiaries. Many use term life insurance as a form of mortgage protection.
Term life insurance premiums are cheaper than mortgage insurance premiums due to one major reason. Most term life insurance policies require thorough medical underwriting. The underwriting incorporates details like driving records, travel history, medical illness history, family history, daily habits (like smoking), and what may be considered dangerous pastimes. When an insurance provider agrees to cover you, they’re aware of the risk they are taking. By assessing your complete profile and outlining all the risks, they are able to offer cheaper premiums.
The cash benefit can be used by your beneficiaries to cover funeral costs, mortgage debts, personal expenses, or anything else they see fit. The major difference between mortgage insurance and term life insurance lies in the fact that the former tends to favour the lender while the latter favours the borrower.
Not only is mortgage insurance expensive, but it is also not guaranteed, has no cash benefit, and its value continues to erode over time. On the other hand, term life insurance has a guaranteed payout with stable value and level premiums.
Why term life insurance is a better choice than mortgage insurance for protecting your home
1. Considerably lower premiums
Term life insurance premiums are decided by many factors ranging from current age and health to personal habits and medical history. The underwriting process covers all stops, leaving no stone unturned. Thus a healthy person can get a higher coverage at a low premium cost.
Moreover, the premiums remain the same throughout the term. Lender-provided mortgage insurance premiums are guaranteed for only your mortgage term; they can go up when you renew your term.
2. Stable payout value
Mortgage insurance coverage declines in conjunction with your mortgage debt. As you pay off your mortgage, the coverage of the insurance benefit you receive decreases.
Term life insurance includes a guaranteed payout if the insured passes away. And the payout doesn’t change – no matter the amortization period.
3. Get more coverage
When you buy mortgage insurance, it only covers your mortgage value; and not a penny more than that. This can be a problem for those who want their families to receive extra benefits after their death. The coverage of a term life insurance policy can be increased to include cash benefits that can go towards keeping your family’s future safe.
4. Flexibility to use coverage as desired
The benefits of mortgage insurance go only towards paying out your mortgage. You or your heirs have no say in how the money should be used. So any extra costs such as consumer debt and student loans remain a burden on your family.
With term life insurance, your beneficiaries get to decide how the coverage should be used. If they wish to keep the house, they can pay off the mortgage and use the rest of the payout to secure their futures.
5. Guaranteed coverage
Since mortgage insurance involves little underwriting, the coverage isn’t guaranteed for the term. A sudden decline in health can cause the lender to rescind their coverage.
A term life policy is only offered after a detailed medical examination, any changes in your health won’t adversely affect your policy.
6. Option to extend the term
A term life insurance policy can be renewed or extended once the term ends. Most policies come with a rider which allows you to extend the policy without additional medical checkups or underwriting.
But a mortgage insurance policy can’t necessarily be renewed. If the provider learns that your health isn’t what it used to be, they can simply refuse to extend your policy further.
7. Choose your own beneficiaries
This is one of the clearest benefits of having a term life insurance policy as opposed to mortgage insurance. The latter will only benefit the lender with no flexibility whatsoever. So, your family will be left high and dry after your death with no direct benefits being given to them.
Buying a term policy will allow you to choose your own beneficiaries. You can include your family, friends, and even pets! It’s all up to you. This way your loved ones can remain financially sound even after your passing away.
If you sell and move houses or even refinance your current mortgage, you’ll have to get new mortgage insurance policies. Mortgage insurance is non-portable: it remains fixed to your property. But with term insurance, you’re free to change houses, get a new mortgage, or a new lender without having to sign up for a new policy.
When is mortgage insurance beneficial?
There are a few situations wherein a mortgage policy fares better than term life insurance. For instance, if your health is poor and you’re ineligible for term policies, a mortgage policy can help you out. Since banks don’t take detailed medical exams, you can more easily qualify for mortgage insurance.
Just make sure to discuss any current health conditions with the provider to ensure your payout doesn’t get mitigated after your death. Mortgage policies are not guaranteed and depend on the final assessment done by the provider after your death. Not disclosing chronic health problems can prove to retroactively cancel your policy and return all the premiums you paid in such a scenario.
As well, those looking for short term coverage can opt for mortgage insurance. The highest payout value of mortgage insurance is in its earliest years. If you plan on paying off your mortgage quickly, mortgage insurance might be a simpler choice.
Helping make the better choice
Mortgage life insurance is an expensive product that helps cover your mortgage if you die during the loan term. The rigidity in its terms and conditions and its substantially inflated premiums, along with a continually decreasing payout makes it a less than ideal choice for homeowners looking for extensive coverage.
Opting for mortgage protection through a term life insurance policy instead can give you enough benefits to cover your mortgage as well as additional expenses after your death; all of this at a cheaper premium. Unless you’re ineligible for a term policy, going for mortgage insurance might not give you the benefits you hoped for. Our insurance experts are happy to look at your current mortgage insurance premiums and see where you may be able to find substantial savings – just book some time with them below.
The information and views provided herein is for general informational purposes only and should not be considered legal or financial advice.
- Mortgage insurance does not require an underwriting process, assuming more risk which leads to additional costs
- Term life insurance can offer more flexibility through an underwriting processes, depending on your health and other factors
- Mortgage insurance can be an alternative for those in poorer health and would qualify for lender provided mortgage insurance more easily than a fully underwritten term life insurance policy.