The Truth About Mortgage Insurance

James Schofield - May 12, 2023
We walk you through the fine print of mortgage life insurance in contrast with a term life policy alternative.

When applying for a mortgage, you are faced with many options including interest rate, term, going fixed or variable, splitting the mortgage into multiple facilities, choosing the amortization; it can be overwhelming. While considering all of this, you are also provided with the option of protecting your asset in the event of death by way of purchasing mortgage life insurance. Often, the mortgage payments are quoted with this insurance added to make it all that more appealing as you now have this number in your mind when considering the budget. This insurance pays off any balance you may owe at the time of death to enable you to preserve the equity and value of the home for your estate and relieving your survivor of any remaining payments.

Sounds great, sign me up! But what are you really paying for when signing up? Chances are, with all of the options you had to consider when arranging the mortgage, this piece was left as a no brainer, without thorough research being invested in understanding mortgage insurance and considering term insurance as an important alternative, and the better choice for many.

Here, we break down the key differences for you to consider:

  • Cost: Premiums on creditor mortgage insurance can be starkly higher when compared to a term life policy. This is because the premium does not distinguish between individuals, only basic factors like age, so everyone pays the same premium, despite their personal circumstances.
  • Declining Benefit: The payout amount on creditor mortgage insurance is equal to the balance owing at the time of death. With term life policies, the benefit amount is equal to the amount chosen at the time of establishing the coverage with your Broker, keeping the value throughout the term. Imagine paying premiums for years while diligently paying down your mortgage, leaving a small balance at death of $20,000. This is the amount of benefit received for all those premiums that did not decrease over time. Yes, your benefit decreases as the balance decreases, but your premiums do not. If, however, you had a term policy with a value of $150,000 at that same time of death, the benefit received would remain $150,000 and of course, without an increase to the premium over the specified term.
  • Convenience: Obtaining insurance through your lender can usually be arranged quickly, answering only a few simple health questions. The cost of this convenience is high; policies are over-priced relative to the benefits and are typically loaded with fine print that can make it hard to collect. Term policies may involve more information gathering as premiums are based on individual circumstances, but lead to higher payout rates and lower premiums given the thorough underwriting process during the application stage.
  • Portability: The beneficiary of creditor mortgage insurance is the lender. This means that if you sell, transfer, or refinance your mortgage, you have to re-apply for the insurance. With term insurance, you name the beneficiary and lock in your age for the term, providing much more flexibility on the disposition of the funds at the time of death, maintaining coverage despite any change in circumstance for the term of the policy, and ensuring no increase in premium while in term

Insurance plays a key role in the financial planning process as it helps protect cash flow, net worth, and overall legacy. Let us help craft the right coverage for you.