The Biggest Mistake People Make when it comes to Mortgage Insurance
August 2020 saw an increase of 36.6% over 2019 in terms of sales, and a 55% increase in listings compared with one year ago in Metro Vancouver, likely a result of the slowing of transactions in the spring due to the pandemic.
If that wasn’t surprising enough, the September 2020 numbers are in, and sales grew again! It was the hottest September market on record, with sales 56.2% over September 2019. This is an increase of nearly 20% over August.
With activity now at record levels, we thought it would be timely to remind you of a common mistake people make when establishing a mortgage.
Obtaining a new mortgage, or re-financing? Don’t forget to pay attention to one important detail.
The process of getting a mortgage can be daunting. Just as you finish reviewing the mountain of paperwork and think you’ve reached the end, the lending professional flips over to the mortgage insurance document. Though your eyes may be glazed over by this point, this is a good place to pause. Mortgage insurance is offered by banks as a matter of course. It’s often presented at the end of this arduous process as a way to insure the borrower, in the event that you die, that the funds are available to pay your mortgage. But this can be misleading.
The bank is the beneficiary of a bank-owned life insurance policy
It is often the case that the insurance being offered by the bank is not in your best interest. Its purpose is to protect the bank’s interest in the mortgage- the beneficiary of the policy is the bank, not you or your family. This can have a number of repercussions for you in the event that you need to access the coverage. The good news is that there is a significantly better option in a place you might not expect- personal life insurance. Yes, a personal life insurance policy can be used as a vehicle to insure your mortgage.
There are key differences in the two types of policies
Below, I discuss a number of the key differences between the two types of insurance- Creditor Mortgage Life Insurance (mortgage insurance) and personal life insurance- and why life insurance is far more beneficial in these circumstances.
Before we dive in, it’s important to note that a mortgage broker is not a licensed insurance agent and they cannot advise you on insurance matters. It is always best to seek advice from a licensed professional before agreeing to purchase insurance.
The ownership varies
When you purchase mortgage insurance through a bank, you are not purchasing a policy but a certificate to a master contract which the bank owns. Because of this, you have no control over the contract. As a result, it is possible for the owner to change the terms of the contract, for example by changing the premium.
When you purchase a life insurance policy through a licensed insurance advisor, you are the owner and control the policy. The contract is between you and the insurance carrier, and no other entity. To maintain the integrity of the contract, you are only required to keep paying the premiums. Upon a valid claim, the insurance company must honour the contract by paying out the stated benefit.
Beneficiary designation and control
The bank is the sole beneficiary of a mortgage insurance policy. This means that in the event an insurance payout, the payout is made directly to the lender and not to your family.
When you purchase personal life insurance, you determine who the beneficiary or beneficiaries are.
Although the purpose of insuring your mortgage is to ensure the mortgage is paid in the event of death, a life insurance policy allows your beneficiary to maintain access and control over the money in a manner that mortgage insurance does not, because the beneficiary is the bank. You are unlikely to know at the time of contract how it will make the most sense to prioritize payments of your debts. A life insurance policy gives your beneficiary the flexibility to determine whether to pay off the entirety of the mortgage or a portion thereof in addition to other more pressing debts and expenses.
The coverage level should be your choice.
With mortgage insurance, the amount of coverage is directly tied to your mortgage balance. As you pay down your mortgage balance, the insurance coverage decreases as well. Once the mortgage is fully paid, the insurance ends. No other debts or expenses can be included in this amount.
Alternatively, your coverage under a personal life insurance policy is based on the totality of your beneficiaries’ capital needs at the time of your death- this includes not only the cost of your mortgage, but also the whole of your family debt, replacing your income, expenses on death, etc. Because the contract is not tied to your mortgage, the amount of coverage does not decrease or end over the life of the mortgage. Rather, your beneficiary will access these funds at the time of your death, presuming you’ve kept up your premium payments, even if your mortgage has been paid off. In some types of insurance policies, the coverage amount may actually increase due to cash values and dividends produced by the plan- but that is a topic for another day.
Your insurance premiums
Mortgage insurance premiums are not guaranteed to remain the same. They may increase based on the master contract. As discussed above, the premium you pay remains the same despite the fact that you are paying down your mortgage. This means that you are paying the same premium for less coverage, increasing the cost of insurance.
Under a life insurance plan, premiums are guaranteed to remain the same for the term of the policy. Some life insurance plans pay for themselves after a certain time-period.
Contract portability: Can you take it with you?
It will take many years to pay off your mortgage. Chances are that over this period of time, you will switch lenders. Unfortunately, mortgage insurance coverage doesn’t transfer to your new lender. Rather, you will have to go through a new application process and may be exposed to increased premiums based on your older age.
Your life insurance policy stays with you.
Claim payment risk: not paying attention to this could leave your mortgage completely uninsured.
This is probably the most overlooked, misunderstood and important part of mortgage insurance. The implications of it could financially ruin your family.
With mortgage insurance, all medical underwriting is conducted by the insurance company at the time of death. This means that the process of verifying whether you are eligible for a claim is completed when you die and not at the time of your application for coverage. In the best case scenario, this introduces a great deal of anxiety for your beneficiaries at the time of your death because they will not know for certain whether they have coverage despite the fact that you have paid into this plan. In addition, medical underwriting takes time as the insurer must review your medical records to assess your eligibility. After the lengthy underwriting process is completed, the insurer may decline your coverage.
Under life insurance policies, all medical underwriting and eligibility assessments are completed before the policy is issued by the insurance carrier.
In conclusion… take the time to get it right.
After the long ordeal of being approved for your mortgage, don’t be tempted to just sign on the dotted line. Please pause and get a second opinion on your options because not all insurance is the same. Find a policy that fits within your overall financial plan and not an added cost that may not serve you in the long term.
Issues |
Personal life insurance contracts |
Mortgage insurance from Lending Institution |
Ownership |
You own the policy and control it. |
The bank owns and controls your policy. |
Beneficiary |
You determine the beneficiary. |
Any insurance payout is made directly to the bank. |
Coverage |
Your coverage remains the same. |
Your coverage is directly tied to your mortgage balance. It decreases as you pay down your mortgage. |
Premium |
Guaranteed premiums. Potential for discounts based on your health/lifestyle. |
Premiums may change over time. Some are “age banded”. No discounts available based on your health. |
Portability |
Your policy remains with you, regardless if you change mortgage providers. |
Your coverage is linked to the lender which gave you the mortgage. If you switch lenders, you may need to apply for coverage again at higher rates. |
Claim payment risk |
Low – your eligibility to receive a claim is completed during the underwriting process before the policy is issued. |
High – little to no medical underwriting is conducted before the insurance certificate is issued. Eligibility to receive a claim is conducted after. |
We’re always happy to chat with you about your options. As always, please feel free to reach out to us at 604-688-5262 or email us at info@ciccone-mckay.com
