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Why mortgage insurance doesn’t work for everyone

You just bought your house – congratulations!  You can’t wait to move in and make your house a home.

With all the excitement that comes with a new house, I’m afraid there’s a downside:  how on earth are you going to pay for this thing?

If you’ve felt that sickening feeling like I have (and still do), I’m sure we’re not alone.  Although we have our health today it might not always be this way…

What happens if you suddenly pass away and you still have a large mortgage?  What will happen to the home you worked so hard to make?  How will your spouse or family cope?  Will your family be able to survive financially after dealing with such a huge emotional loss?

Serious questions that require some serious answers for sure…

This is why having an adequate amount of insurance is important, to protect your family in the event of a catastrophic loss.  Yet which product is right for you?  Mortgage insurance or individual life insurance?

I have my bias but I’d like you to check out this table to help you make your own decision:

Mortgage Insurance

Individual Life Insurance

The agent you are dealing with is probably not a qualified insurance professional, unable to look at all your insurance needs. The agent you are dealing with is likely a qualified insurance professional, specifically trained to look at all your insurance needs.
Your benefit amount declines as you pay off your mortgage. Your benefit amount remains steady as you pay off your mortgage.
Mortgage insurance may or may not be cheaper than individual life insurance. Individual life insurance may or may not be cheaper than mortgage insurance.
Your policy is not portable; if you switch lenders or move to another home. Your policy is portable; if you switch lenders or move to another home.
When the lender offers mortgage insurance, the lender is the beneficiary. With individual life insurance, you decide who the beneficiary is.
If you die, only the mortgage balance gets paid. If you die, the mortgage and/or other liabilities can get paid.
Mortgage insurance is not convertible (to a permanent life insurance plan). Individual life insurance is convertible.

I suspect the last thing on your mind after you bought your new home is life insurance, I get that.  But before you ink your name to any mortgage insurance consider some of the drawbacks, inferior coverage with potentially higher premiums when compared to individual life insurance.

In recent years, I’ve declined mortgage insurance in favour of holding individual life insurance for some of the reasons above but also many more.  I encourage you to do your own homework, understand how the underwriting processes work, before you sign any insurance policy.  When in doubt consider consulting a life insurance specialist who can help you unearth the best protection benefits for you and your family.  Mortgage insurance is definitely convenient but remember convenience usually comes at a cost.

What’s your take on mortgage insurance?  Own it?  Used to own it?  Do you favour life insurance over mortgage insurance like I do?

Filed in: Insurance, Lessons Learned

24 Responses to "Why mortgage insurance doesn’t work for everyone"

  1. I think you missed the number one reason to avoid mortgage life insurance. It’s so bad that many people simply can’t believe how it works. With mortgage life insurance, the underwriting isn’t done until you die. This means that if you die, some insurance company will then check to see if you qualified for life insurance. They will did around your health history and your risky activities and possibly decide not to pay. This risk alone is more than enough to decide on getting a policy where the underwriting is done before you start paying premiums.

    • Thanks Michael, you’re of course right. With private insurance, once you have the policy, the underwriting is all done. I implied this when I wrote about “inferior coverage” but this certainly didn’t jump off the page for folks. I updated the post to include “understand how the underwriting processes work” since I believe many folks who buy this product (like I did in the past) didn’t understand it. Even if they do understand this, it’s still an inferior product for the reasons I outlined above.

      My wife and I now own (have owned for many years) individual insurance. A way better product for our needs.

      After our mortgage is done, and we have no liabilities, not sure what we’ll do with insurance (have some, have very minimal, other). As long as we have a mortgage, we’ll have life insurance for sure though.

      Thanks for highlighting the issue.

  2. Interesting post.

    To be honest I never really gave it very much thought. In the past I’ve always declined before we both had decent life insurance policies.

    Some good points raised about that may make be reconsider.

    It’s funny, I was talking to my wife’s parents the other day and they mentioned their first mortgage was $50,000 in 1980. I responded that that seems terribly low, annoyed at the size of my mortgage.

    The responded that “but $50,000 was a lot of money in 1980″. I then looked up an inflation calculator and saw that $50,000 equals about $140,000 in todays dollars.

    Ha….I wish my mortgage was $140,000…I would be living large!

    John

    • I hear ya John, with the $140 K mortgage. I wish mine was that low! Hopefully it will be there in another 4 years, that’s the plan!

      Thanks for your comment and hope to see you around the blog often.

      Mark

    • Bet Crooks says:

      Ok, but in 1980 the minimum wage was about $3-4/hour too. (3.15 in Manitoba) I know someone who was working as a engineering manager with over 25 years experience for a multinational: in 1986 he was making $56,000/year. You have to include what salary you would have been making as well as what your mortgage was if you want to have a valid comparison.

      OTOH I know that housing prices are absolutely ridiculous is some of Canada’s major cities right now. I assume you’ve had the misfortune to have to buy during these crazy days and I can understand your frustration.

      When we bought we were both working at jobs with life insurance as a company benefit. We had no children yet so we couldn’t see why we would even want to keep the house if one of us died. So we never got mortgage insurance. Given the info in this article, I’m glad we didn’t as it seems like a product that’s only useful for someone with no ability to get regular life insurance.

      • Housing prices remain nuts in many of Canada’s major cities. I could not afford to live in Vancouver for instance.

        Avoid mortgage insurance Bet Crooks, it doesn’t make sense for many people.

    • Barbara says:

      John, how would you like a $140,000 mortgage with your interest rate at 16 percent? Yes, that was the option in 1981. I was just graduated and I well remember one day at coffee break, my poor boss trying to decide what renewal term to lock into. 16% for five years or 23 percent for one year……..

      The younger ones today love to complain and say it was easier for their parents, but it was definitely harder, that is why houses are so fancy today (granite counter tops, etc) and prices are higher. Your monthly costs are lower…

      A $50,000 mortgage in 1980 was a very small mortgage in 1980 as well, so your wife’s parents were being frugal. New suburb homes were much higher priced. But the years 1980 and 1981 were huge slumps for the housing market (new home construction) and there were federal and provincial grants offered to new home buyers to get them into the market.

      I did work in the Dept of Finance Economic Forecasting section at the time, so was well aware of all economic data.

      • I heard the same tale from my parents Barb. I recall they bought the house I grew up in, in 1980. Horrible interest rates for borrowing. Great to be an owner of a GIC though :)

        I suspect every generation has its challenges. This environment isn’t exactly great. Savers are punished today, with ultra-low rates for so long. Thoughts?

        • Barbara says:

          I think that back in the early to mid 1980s, because interest rates were so high and the economic climate uncertain (the recession in the early 1980s was deadly….) that this led to people being pretty cautious about overspending and buying too much house.

          And even any spending. For instance, you didn’t want to put any money down on a product to be picked up later, because you might come back a week later and the store would be out of business.

          Yes, GIC rates were high if you had money to save! I remember my mom phoning me and asking what I thought about her locking in her money at 19 percent for five years!!! She was hesitant….I told her to put everything she had into that term, and I was right as that was the peak. I was concentrating on paying back my student loan.

          Today’s low rates are hard, that is why I am reading blogs like yours, there is always something new to learn. With my mortgage finally paid off last year, its hard to know how to best save the cash that went that way. I have zero incentive to park it in a GIC or similar. My final strip bond, bought way back as part of my RRSP, finally matured this past month, it was paying 9.75 percent since purchase.

          PS. We never bought mortgage insurance either. Bought term insurance when I was pregnant with first baby.

  3. Joe says:

    Great post Mark. My fiancee and I are currently looking for our first house and to be honest with you, this topic really hasn’t crossed our minds. I better start researching……
    Cheers
    Joe

    • You’re welcome for the post Joe. Again, live and learn, since I made this mistake of holding mortgage insurance for a couple of years. I have no idea what I was thinking. At least I can try pay it forward…

      Good luck with your house search Joe.

  4. Ben says:

    I agree. Life insurance is generally fairly cheap as well (term life insurance) especially for those that are not close to retirement age.

  5. Hey Mark,
    We were offered the mortgage insurance by our broker when we signed up and they automatically signed us up even after we said no. They gave us some trial or something and we had to manually call to stop it. We went with the life insurance which in my opinion is the better way to go for the reasons you have listed.

  6. >>>>The agent you are dealing with is likely a qualified insurance professional, specifically trained to look at all your insurance needs.

    Specifically trained? *couch*. I have a slightly less optimistic opinion of the average insurance professional than the author of this article I guess :).

    In recent years I’ve been contesting the idea that mortgage insurance is underwritten at time of claim and term insurance isn’t. Term insurance can and very possibly might be underwritten at time of claim. I’ve had claims take 4 months to get paid because the company started ordering doctor’s reports after death. No, the problem isn’t the difference in underwriting specifically, the difference is that consumers don’t pay attention to reading the documents on mortgage insurance. They just sign. They could be singing that they have a big blue baboon butt for all they read. The company checks after death, finds no sign of this, and denies the claim. I just think it’s less likely on a regular policy, where the questions are normally asked explicitly.

    There’s two other faults with mortgage life insurance everyone misses – and they’re biggies. First, you switch banks when you renew, it’s new life insurance – and thus new rates. That means mortgage insurance is a best 5 year term – term life insurance is typically level premiums for 20 years. Not at all the same pricing. If the two products are even remotely close, the term insurance is better because the premiums are level for that time period.

    Secondly, there’s no exchange or conversion option on mortgage insurance. On term insurance, this allows you to convert your term policy to lifetime coverage if you become uninsurable. Who cares? Uninsurable people care :). By contrast if you become uninsurable holding a mortgage life insurance policy and all you get from the bank is that laugh like Nelson from the Simpsons HAH hah! Look who can’t get life insurance anymore. (I’m treating it lightly, but it’s extremely serious when I get calls from people with mortgage insurance who just became uninsurable. With term insurance, no problem – have a healthy policy. With mortgage insurance, you’re basically screwed).

    • Specifically trained? Ah, c’mon Glenn, you’re just jaded! :)

      Kidding really, you know much more about the insurance business than I do, and I appreciate the detailed comment you left.

      I had no idea actually, some underwriting happens after the life insurance claim goes in. I thought, once you have the policy via private insurance, you have the policy.

      Back to the mortgage insurance, for sure, when you switch banks you’re at the mercy of new mortgage insurance rates. This is why I included that sad tale in my table. I also included the conversion option.

      For many reasons, life insurance wins and I’m glad we have it as long as we have such high debt like our mortgage.

  7. We both have individual life insurance. In my opinion, if you are going to pay for insurance, it should be individual life. Mortgage insurance just doesn’t have some of the benefits that are necessary if one of us passed.

  8. Sudip says:

    I just wanted to add my 2 cents. I do not have experience of seeing someone trying to claim life insurance after ones departure but have seen some cases with mortgage insurances – where often one phone call is enough to take care of things.
    The main problem is that the premium is way off chart for the mortgage insurances..

  9. Shawna says:

    The policy will provide no additional maintenance and will payout the death
    benefit and the cash value makes cash value whole life insurance insurance one of the benefits.

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