If you currently have a mortgage on your home then you probably have mortgage insurance. Mortgage insurance helps pay off the balance of the mortgage if you were to become seriously ill or die, thereby allowing your family to stay in your home.
While the concept is great, unfortunately it is not that simple. The generic questionnaire can be confusing and is certainly lacking the details required to thoroughly evaluate your insurability. There have been cases where families have purchased coverage and thought they were protected only to be denied their claim when they became ill or died. This problem arises from the underwriting process. Unlike individual life insurance, mortgage insurance sold through most financial institutions is not underwritten until the claim is made. This means that the insurance company may determine that you are ineligible for a payout even though you have been paying premiums. For instance, the insurance company may investigate your medical records and discover that you once had high blood pressure which you did not disclose in your application, thereby denying your claim. This may be a result of completing the application incorrectly, and/or not understanding the insurance product.
This method of underwriting for mortgage insurance is called post-claim underwriting, a practice which is banned in some states in the U.S., but which is legal in Canada. This is one reason why many insurance experts believe that conventional life insurance would be a better fit for the majority of home owners. The main advantage of life insurance over mortgage insurance is that when you apply your medical history will be examined before a policy is issued and you start paying your premiums. Thus, you will know upfront whether you are covered.
Other advantages include:
- Since the premiums you pay for individual life insurance is based on individual risk, your health history will determine how much you pay. Also, non-smokers and women pay lower premiums. However, the opposite is true for mortgage insurance. With respect to mortgage insurance everyone is considered to be of equal risk, with premiums based on age and amount of coverage. Therefore, there is usually no discount for non-smokers or women, and the healthy population can be perceived as helping to subsidize the non-healthy. This leads to generally more expensive premiums when purchasing mortgage insurance.
- When you purchase individual life insurance you pay premiums for a pre-determined amount of coverage and the beneficiary receives the full amount, but the balance of your mortgage decreases over time while your premiums remain the same.
- When benefits are paid from a private insurance claim they are paid to the beneficiary, whereas mortgage insurance benefits go to the bank that holds the mortgage. This allows some flexibility in that the beneficiary may use the funds however he or she desires.
- Private insurance is a guaranteed contract while mortgage insurance is a one year renewable policy which may be canceled at any time.
- You are not tied to the bank if problems arise. Changing banks would not be an issue with private insurance but mortgage insurance obligates you to stay with your current bank as long as the insurance is in effect.
Insurance is intended to provide individuals security and comfort in knowing that their family will be taken care of if anything drastic happened. Mortgage insurance does not provide this since the owner of the policy will be in doubt as to whether they are actually covered. With ample coverage under a life insurance policy, your family’s financial future is not so uncertain and comfort and security is not an issue.
You can also view the following link to view a video on CBC Marketplace which details the disadvantages of mortgage insurance
Of important note: mortgage insurance forms only part of a complete family’s needs analysis. It is critical to determine an appropriate amount and type of protection suited to your unique situation. This process involves gathering your coverage details from your employers, financial institutions, and personal plans. We will also help you determine the amount of protection required to fund other debt obligations, family’s ongoing income needs, legal and funeral expenses, income taxes, and children’s education
Please contact us for a personal meeting to review this important aspect of your financial plan.