Mortgage Insurance Coverage Ideas for Canadians
Use Cheap Term Life Insurance to Cover Your Mortgage
When you purchase a home and arrange for a mortgage you are always asked if you want to purchase insurance so that the mortgage gets paid in the event of one of the owner’s death. Almost 75% say yes but what do the other 25% know that leads them to pass on this mortgage insurance?
Most of them have read articles in newspapers and magazines or read books that convinced them that a private insurance policy would not only cost less but offer some very important additional benefits compared to traditional mortgage insurance offered by financial institutions.
The following table summarizes some of the primary differences between the two.
|Bank Mortgage Insurance||Term Life Mortgage Insurance|
|No discounts on premiums for healthy people.||Discounts on your premium if you are a healthy person with a healthy family history and healthy lifestyle – (Very significant savings for older people.)|
|The older you are the more expensive premiums are – in comparison to a personal policy.||Over 15 companies competing for your business – get the best rates available based on your health situation.|
|Policy is owned by bank.|
Policy is owned by you .
|You have a separate policy for the mortgage and other policies for other life insurance needs.||You can combine all your insurance needs and get a lower rate with your own plan.|
|The bank controls the money and pays off the mortgage – it is a declining amount||You own the insurance and it is not tied to the mortgage lender. Complete freedom to change mortgage lenders.|
|Declining amount as mortgage is paid off yet premiums do not decline||Term policies do not decline over time . If you start paying for $200,000 that is what is paid out regardless of current mortgage amount. In addition, for couples with children, we insure both parties a few dollars more a month-added insurance should both parents die.|
|When you renew your mortgage or switch lenders you need to qualify for new insurance-if you have a major health issue you could loose your insurance.||You own the policy and the term is what you choose. Even at the end of the term, you have the right to renew but at a higher cost unless you are in your 70’s.|
|Can not convert it to any other kind of insurance||Can convert all or part of it to a permanent insurance policy with no medical evidence required.|
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Are you surprised to learn the above? Does any of this cause you concern? One of the key points that many miss is the fact that the bank mortgage is frequently not guaranteed renewable when you renew your mortgage. One person I know found this out the hard way. Her husband suffered a heart attack and when they renewed their mortgage she claims she told the person doing the paper work of her husband’s heart attack. She was asked to sign here and initial there-most people have experience this with a bank.
When he died four months later the bank investigated and declined the coverage stating that she had signed that there had been no change in her or her husband’s health-one of those initials she was asked to do. However, had the person doing the application heard her comment or if she had read what she was signing and not signed, then the bank would not have issued the insurance in the first place so either way her husband could not get insurance. Had he been covered privately, first he would have had his rates guaranteed for 10 or more years depending on the term and he was also guaranteed to be able to renew the policy regardless of his health but for a higher premium. Which insurance do you want?
So having determined that you want a private policy there are several alternatives. The primary one is term insurance where the monthly premiums are guaranteed for a fix period of time-10 or 20 years are the most common with the majority opting for a ten year term. If your purchase a 10 year term policy, then in ten years, we will broker a new policy to cover the balance of the mortgage. If you still have your health, we can usually do it for about what your are paying for the first ten years as the principal to cover is less having paid some of it off. If you are no longer insurable, then the guaranteed renewal rate is quite high as they assume the only reason you would renew is because you are uninsurable but at least you can still purchase it. Interestingly, many people renew not realizing that they should go out and get a new quote and policy which could save hundreds of dollars. Get a term quote now.
Those who do not want to take the risk of being uninsurable in 10 years and having to pay a significantly larger premium on renewal opt for a 20 year term which will usually see their mortgage essentially paid off. They pay 25% to 35% more in the first ten years for this security.
Some people also will purchase a small critical illness policy which will pay a lump sum if they contract a critical illness. This money can pay for the mortgage for a years or so and help with extra expenses. It can also cover your spouses lost wages if they take time off work to be with the ailing spouse. Normal amounts are $25,000 to $50,000 for this purpose.
If you do not have disability coverage at work a small number of people will also look at taking out a disability policy to cover the principal and interest payments. This is far more expensive than Critical Illness insurance so most people opt for the former. You can reduce the cost of this by limiting the period that it will be paid or waiting a number of months before it starts.
Another alternative is a private mortgage insurance policy which looks much like the bank insurance, but you control it so it does not go through renewals and it stays with you if you switch mortgage carriers. They also offer critical illness and disability insurance as part of their package and pricing is a little more expensive for those under 35 and less for those over 35. The small added premium for those under 35 is well worth it as the rates are guaranteed into your 30’s and 40’s where the banks increase as one gets older.
There are also significant differences between these policies as well. The Cadillac of the policies covers the mortgage principal for both death and critical illness and their critical illness insurance is not just heart attack, stroke and cancer like the banks but a full line policy with 23 illnesses and medical conditions. The disability insurance will pay your principal and interest payments whatever they are at the time. This is unique as should your mortgage payments increase due to interest rate increases or because you choose later on to reduce the amortization period-they will make the mortgage payments.
For example, let’s say that they were $1,500 per month when you took out the policy but interest rates have increased and it is now $1,900 per month – it is covered and your premiums did not change. A more interesting example is that you had a raise and when the mortgage renewed you decided to pay it off faster and your new payments are $2,000 per month and it will be paid off in 10 years. Your new $2,000 per month payments are now covered and again your disability premiums do not change-they are the same as they were at $1,200 per month. If you can afford this policy, it really will ensure that if you die or contract a critical illness your mortgage is paid off and if you get a disability your payments are made regardless of what the payments have become since you took out the policy.
So what does all this mean to you? It is simple, let the mortgage broker do what their specialty is and then say “no” to the offered insurance and turn to an expert in life insurance to provide you with the best brokered solutions to meet your particular personal insurance needs. At IDC Insurance Direct Canada we specialize in helping our clients get the best possible mortgage insurance coverage for their budget risk tolerance.