Mortgage insurance is a great concept. However, it should be purchased from an insurance professional, not from your lending institution or mortgage broker.
After approval for a mortgage, lending institutions or your mortgage broker will commonly offer the homeowner(s) mortgage insurance. This is life insurance on a homeowner that pays off the balance of the mortgage owing if the insured homeowner were to die. This is not the same as CMHC insurance, which is required if you buy a home with a down payment less than a certain threshold – this is known as mortgage default insurance.
Having life insurance in place to pay off the mortgage in the event of the homeowner’s death is an excellent concept. This alleviates immense financial stress and hardship during the grieving process as the home no longer requires mortgage payments and is owned outright. However, homeowners are better off pursuing this insurance coverage privately with an insurance specialist, not with their lending institution or mortgage broker.
Comparing mortgage life insurance through an insurance specialist (also known as purchasing privately) vs the mortgage lender:
- Affordability: the insurance premiums are often less costly if you buy insurance privately.
- Death Benefit: with insurance from a lender, the policy death benefit will decrease each month as the mortgage balance gets reduced; however, the insurance premiums will remain the same. Privately-held life insurance gives the homeowners the option to keep the death benefit level, or have it reduced. The choice is theirs.
- Flexibility: goals and objectives may change over time and the homeowners may choose to use the insurance proceeds elsewhere. With the lender’s mortgage insurance, the proceeds go directly to the lender.
- Ownership: the lending institution owns the insurance, not the homeowners. With that comes a loss of control over managing the policy and the beneficiaries. By pursuing insurance coverage privately, the homeowners remain in control.
- Portability: private insurance coverage stays in force, even if you switch lending institutions when your mortgage term expires. Insurability can change in an instant. Having guaranteed insurance coverage regardless of what happens with your mortgage is imperative.
- Security: traditionally, insurance through the lending institution will underwrite at the time of claim. This opens the door for the coverage to be invalid if there were pre-existing conditions not disclosed on an express application. If there are other issues not specified, that can also cause the denial of coverage. With a licensed insurance professional, the underwriting will happen at time of application and you are able to remove a lot of uncertainty from the equation.
We specialize in providing this type of insurance for homeowners. Contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca to get started on a life insurance application or for more information on the subject.
DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.