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.
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. Be very mindful that 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. Not a great idea nor product.
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? Do you favour life insurance over mortgage insurance like I do?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Very useful! Thank you for sharing. I’d like to hear more from you.
Welcome!
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.
Good call Daisy. Mortgage insurance absolutely does not have some of the same benefits!
>>>>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.
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.
Geez, had to manually stop it? Not cool.
I agree. Life insurance is generally fairly cheap as well (term life insurance) especially for those that are not close to retirement age.
Yes, any young professional should never buy mortgage insurance. Makes no sense to me when they could get great term coverage, likely, for less.
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.
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.