Let’s imagine a scenario. You’ve saved a substantial downpayment, and are now in the middle of the process of jumping through hoops in order to be approved for a mortgage. You continue to keep your eye on the prize, because you’re so excited to own your own home. When you finally make it to the lawyer’s and sign the paperwork, there’s an extra page that maybe your mortgage broker didn’t even mention to you:
“Mortgage Insurance – Accept or Decline?”
Let’s be clear. If your down payment was less than 20%, in order to obtain a mortgage, you must pay for mortgage insurance. This insurance is for the banks, so that if you default they still get paid. What we’re talking about is different. The mortgage insurance you are being propositioned with in the paperwork at the Lawyer’s office is to insure your family – to pay off your mortgage in case you die. It sounds like a good idea.
You may immediately think that you want your loved ones to be able to stay in the family home without financial stress. And the monthly price they are offering to bury in the mortgage pales in comparison to the actual mortgage payment. Plus the added thrill of getting a new home… why not right?
First of all, know that in every case Planswell has compared, the cost of term life insurance is cheaper than the cost of mortgage insurance. This is strange because the costs to administer mortgage insurance should be drastically less than term life insurance for the main reason that you should never buy it: it is underwritten at the time of claim.
Underwriting is the process where the insurance company decides if they will insure something, and if so, for how much. Mortgage insurance asks you a few quick questions, that you probably don’t understand, and then they issue you the policy without digging any deeper.
Then, if you die, they investigate your medical history and background looking for things that if they had known about, they surely would have declined insuring you. Sure enough, there are countless tragic stories all over the internet about families who thought they were insured, then end up not getting paid when one of them passes away.
Another strange feature is the fixed premium for declining benefit. If the insurance is $100 per month when you start, after four years, it’s still $100 per month, but because your mortgage is now thousands of dollars less, so is the potential benefit of the insurance policy. The policy is more in the bank’s favour than yours.
What if you died without any other insurance and your kids inherit a newly-paid off house? They would still have to sell it to pay for food, let alone property taxes. However, if you had term insurance, they could have continued to make mortgage payments while supporting their lifestyles with the cash payout.
What if you almost died and didn’t? What if you get cancer, three years into the mortgage and survive? Next time you get a mortgage you won’t qualify for the insurance, and you likely won’t qualify for term insurance either. Compare this to term insurance, which is typically renewable forever once you’ve applied and been underwritten.
It is important to at least consider mortgage insurance as a temporary coverage (or fall back) until you are able to speak to an insurance broker/specialist to complete a proper insurance review with all options on the table to serve the clients own best interests. Sometimes it takes a bit of time to have a fully underwritten regular insurance policy underwritten, so mortgage insurance can bridge a potential gap in coverage in some cases.
To be clear, we recommend that you secure private, term life insurance before you get to the point of declining the mortgage insurance. While term insurance is better than mortgage insurance, mortgage insurance is still better than no insurance at all. The good news is, even if you are locked into a fixed rate mortgage, you can still apply for term life insurance at any time, and if you get approved, you can cancel your mortgage insurance without penalty!
Updated on June 28th, 2019