Mortgage Insurance – What to know and what to avoid

The purchase of a new home more often than not comes with a hefty price tag, and a mortgage often in the six digits especially in the Lower Mainland. While you enjoy your home, it’s important to ensure that your large debt is covered in case of death or severe illness.

Most financial planning experts agree that life insurance on a mortgage is essential. There are several different avenues, and price points, you can use to achieve this. The most common and arguably the least secure way is directly through your lender. A common scenario is a couple signing on all their final mortgage documents and are presented with the question: “Would you like your home to be paid off in case one of you dies or gets sick?” to which most couples eagerly answer: “Yes!”. Boom. Mortgage insurance through your lender is what you now have. While an inexpensive and easy way to insure your debt, a google search of “mortgage life insurance” will quickly show you that there are other alternatives available in the marketplace that better serve the needs of you and your family.

A personalized life insurance policy, through a licensed broker, is almost always a better way to go. There are several key differences that may not seem to be important at time of signing, but will be key in the unfortunate event of a claim.

What is the process for getting mortgage insurance?

Key difference here is when the “underwriting” or obtaining of information is done. With mortgage insurance offered by a lender, the underwriting is commonly done at time of claim, as opposed to time of application. This means that that the underwriting for the coverage will be done after the insured person has either passed away or fallen ill. Technically, this leaves room for your claim to be denied as has happened to many unsuspecting Canadians. With privately owned insurance, all underwriting is done at the time of application. This means that all medical information has been obtained and used to make a decision of offering by the insurance company, before any insurance is offered to you. Once in place, a privately owned policy can only be cancelled or changed by you, the policy holder, as opposed to the insurance company.

What exactly is covered?

With traditional mortgage insurance sold by your lender, the balance of your mortgage is all that is covered. If you have had your mortgage for several years, this amount could be substantially less than what your original mortgage amount was for, even though your premiums will have stayed the same as they were when you first took out the mortgage. For example, if your mortgage was $500,000 to begin with but at time of claim the balance is down to $350,000, the best case scenario is that the $350,000 will be paid off. With a privately owned policy, the entire $500,000 would be paid out and how you decide to allocate that money is in your control. This brings me to my next point.

Who is the insurance paid out to?

In general, insurance sold by a lender has the lender as the automatic beneficiary. With a privately owned policy, you can name your spouse, children, or anyone else who you trust to be the beneficiary and outline to them how you would like the mortgage to be taken care of.

What if I pay off my mortgage?

With lender offered insurance, your mortgage insurance would be terminated. In case of a privately owned policy, your insurance would still be in place even if your mortgage were paid off (depending on the term of the insurance, of course). In that case it would be worth having a chat with your beneficiary to guide what they do with the death benefit, now that there is no debt to pay off.

What happens if I get sick, and can’t work?

If you can’t work, your life insurance is unlikely to help unless there is a Critical Illness rider, or some cash value in a private policy. It’s advisable to look into Critical Illness coverage, which would be offered by any licensed insurance broker. At time of claim under a properly written insurance policy, you would receive a one-time lump sum which you can use to pay off your mortgage if you choose.

There are several key differences between lender offered insurance and private life or critical illness insurance. It is worth taking the time out to do research, ask questions, and compare offerings. This will likely save your loved ones much hardship and financial duress at a time when a mortgage payment should be the last thing on their mind.