Mortgage Insurance Versus Life Insurance

If you are a new home owner, congratulations! Buying a home is no small feat. By now, you are likely paying for or have heard about something known as mortgage protection or the big banks’ mortgage life insurance. Sound familiar? Many Canadians sign up for the banks’ mortgage insurance as a necessity. You see, the Canadian Mortgage and Housing Corporation (CMHC), has made it mandatory for any would-be homeowner who is putting down less than 20% as a deposit on their home purchase some type of insurance. Many Canadians purchase the bank’s mortgage insurance product without fully examining their options. The details below highlight the benefits of life insurance as opposed to mortgage insurance and why you should take a close look at what you have.

Note: Mortgage insurance and term life insurance serve the same purpose but there are key differences. They both address a liability whereby if you pass away, the beneficiary receives a large sum to cover expenses. In this case, that would be the balance of the mortgage.

A mortgage amount decreases or is paid down over time. While mortgage insurance only pays off the mortgage amount remaining, life insurance will pay the total or face value amount through the duration of the contract. So, while you may start out with a mortgage of $500,000, mortgage insurance coverage will decrease as you pay down your mortgage, but your monthly rates will stay the same. In other words, you will be paying the same premium amount over time but receive a lower benefit payout as your mortgage decreases. The most striking example I know of is a family who paid their mortgage insurance for nearly 19 years, and when the husband was killed the mortgage was nearly paid off. The remaining balance of the mortgage was only $1400. Yes, that is right, just $1400. They paid the same monthly premium for 19 years and they only got $1400 in mortgage insurance.

Who owns your mortgage insurance? This poses another key difference between mortgage insurance and life insurance. With mortgage insurance, the lender owns the policy whereas with life insurance the policy owner owns the policy. Why is the ownership of the policy important? Well, let’s say you change lenders or banks, and let’s say that 10 years from now another financial institution offers a more attractive mortgage rate. If you choose to change lenders, your mortgage will subsequently be cancelled; you will need to reapply with your new lender for mortgage insurance. With a life insurance policy, it does not matter what bank your mortgage is with; if you die, your beneficiaries receive a cheque for the full amount of insurance and they choose where to allocate the money. The benefit amount is free of tax and exempt probate in most circumstances. Furthermore, in Canada, should the insurance company become insolvent, there are safeguards in place that will cover most, if not all, of the face value of your policy. (see www.assuris.ca for more information on coverage limits.)

Take this real-life scenario. You decide to transfer mortgages to another institution because of a better interest rate. You had mortgage insurance on the first mortgage, and assumed, because your mortgage broker would not have told you otherwise that you would be able to have the same protection on the new mortgage. Unfortunately, your health has deteriorated in the meantime, and when you apply for the mortgage insurance with the new lender your mortgage insurance was subsequently declined, leaving you with no mortgage insurance protection. If you had life insurance from Day 1 instead of mortgage insurance you would still be covered with no need to reapply.

This brings me to my next point; most lenders and mortgage brokers are not insurance agents. Life insurance brokers have the training and experience to determine what your income needs are and how to find the best product to fit your and your family’s unique needs. Going back to the example above, if you had someone working with you that had insurance training instead of mortgage expertise that person would have known that your insurability would be an issue.

I also want to touch on what a family needs to plan for beyond a mortgage. In other words, if you passed away today, even with your mortgage paid off what kind of lifestyle would your family lead? Would your family be able to keep to their standard of living? Could they be able to pay for your child’s education? If you pass away and have mortgage insurance your family gets a paid-off home, which is good, but is that enough? 50% of most households’ budgets coverage your mortgage however the other 50% will go towards groceries, heating, electrical, car costs, etc., Planning for that missed income is another piece all families should consider.

Finally, life insurance is quite often much less expensive than mortgage insurance. Bonus! While the process to go through underwriting will likely be longer, the bottom line is you will pay much less for a better product and that makes the decision easy, doesn’t it? Life insurance is clearly the superior product. One thing is for sure, if you have life insurance needs, as all families do, you should always talk to a licensed insurance professional.

Marino Attanasio,

Simpli Insurance

416-705-9961