Mortgage Insurance

The Things They don’t want you to know about

Are you considering buy mortgage insurance from the bank? If so you may have been led to believe that this is unique and special, but is mortgage insurance different from all other types of life insurance? YES! There are many factors that make the bank’s mortgage insurance inferior compared to owning your own life insurance policy. This special report reveals all the dirty little secrets that the banks don’t want you to know about when it comes to mortgage insurance.

Now please don’t blame the lending officer at your local branch who tries to sell this coverage to you. They are just following orders from the branch manager to sell this very profitable product. They don’t hold an insurance license (chances are they don’t hold a mortgage license either, but that’s another story) so they are not aware of other options out there…all they know is that they have a quota to meet to earn a bonus.

Secret #1… Tied Selling

If a lender or bank associate tells you that you are required to buy the mortgage insurance in order to get the mortgage, that is against the law. This is called tied selling and it is illegal in Canada. When buying one product you can’t be required to purchase a second product in order to qualify for the first. The bank’s decision to loan you the money must be based on your financial qualifications, not on if you adequate life insurance coverage.

So what is Mortgage Insurance?

Basically, mortgage insurance is a term life insurance policy that the banks buy in bulk from insurance companies like Manulife, Sunlife or Great West Life etc. The bank the resell smaller amounts of coverage to their mortgage clients with a heathlyprofit on top that can be added to their monthly mortgage payments. It’s easy, it’s convenient but is it a good deal?

Secret #2... Declining Coverage

Did you know that the amount of mortgage life insurance you are covered for goes down every time you make a mortgage payment? It’s true! You are only covered for what you owe on your mortgage. Thus, as the months and years go by, your insurance coverage is less and less as you pay down your debt. This may be OK if your premiums went down each month with the balance of your mortgage, but alas this is not the case. Your mortgage balance goes down and your mortgage life insurance premiums stay the same. What may appear reasonable today may become expensive over time. For example:

You buy a home at age 35 with a mortgage of $350 000. Mortgage insurance for you and your spouse may cost around $80 per month (22.8 cents per thousand dollars of coverage). 15 years later, you have been good and paying off your mortgage quickly and you only have $50 000 left to go. You are still paying $80 per month but now for just $50 000 coverage. That works out to $1.60 per thousand dollars’ worth of coverage. This is very pricey compared to what you could have bought.

Life insurance can be purchased very inexpensively whereby you lock in a level coverage amount with locked in monthly payment for a specific period of time (10 years, 20 years, 30 years or even life). With a personal life insurance plan you have the peace of mind that god forbid something happens to you, those you leave behindwill have the financial security you originally planned for them to have.

Secret #3... Are you really covered?

One of the biggest secrets that they don’t want you to know about is that mortgage insurance doesn’t provide full and complete coverage? You may ask “How can the bank sell me a policy that is not guaranteed to payout if I die?” The answer lies in the underwriting of the plan.

Underwriting is the process by which the insurance company looks at one’s health history, lifestyle and financial situation to qualify for coverage. Most Canadians qualify for coverage, but many do not because of their health or other high risk factors. Mortgage life insurance applications are simple and only ask a few health related questions (i.e have you had a heart attack, cancer, or are you currently disabled). Answering yes to any of these questions will automatically decline your application, however there are many factors that are not asked about that may result in coverage being declined.

Unfortunately, the only way you will know if you are accepted or declined for insurance is after a death and a claim is made. The fight begins as the claimants now have to collect past medical evidence to prove the person who died was healthy and insurable when they ticked off the boxes on the life insurance application. It is an unenviable situation to leave a grieving loved one to work through a claim against a bank who has a trained staff attempting to find any possible reason to deny the claim and not pay off the mortgage.

There are countless numbers of horror stories of banks refusing to pay out claims or making life very difficult for beneficiaries. Even CBC’s Marketplace did an exposé on the matter. If you personally applied for life insurance it would have been underwritten before the policy is issued. You would have a visit from a nurse to take your height, weight, blood pressure, possibly make you pee in a cup, borrow a vial of blood and or listen to your heart. They may even get a report from your doctor or have a doctor visit you. All this information is collected and reviewed before the policy is issued. If you are insurable a policy will be offered, and since the insurance company has all the information up front, god forbid a claim is made, the benefit will be paid no questions asked. If you are at a higher risk, you could be offered an increased premium, or be declined coverage altogether. Wouldn’t you prefer to know this now rather than have it be discovered by your loved ones after you are gone?

Secret #4... Who is really covered?

So your family suffers an untimely loss and they go through the arduous process of making a claim and are able prove you were insurable when you bought the policy. The mortgage is paid off but your family’s burdened by the both the cost of your final expenses and the loss of your income. The bank is covered as the insurance company pays out the mortgage and they get their money back… their covered! Your family on the other hand is without the monthly mortgage payment but in debt elsewhere (at higher interest rates and monthly payments) getting on without you. Many times after a loss families are forced to remortgage the home in order to get back on track. Without your income your family may not be able to qualify for the same terms and conditions as you had before. The bank cannot call your mortgage if there is a death as long as the payments continue to be made.

A personal life insurance policy pays your family a lump sum of tax free cash. It is up to them to decide what is best to way to utilize the funds. They will need this to cover final expenses, loss of your income and possibly your spouse’s income during the grieving process. Personal life insurance plans cover your family first and give them the option to pay off the mortgage with the proceeds if that is the best use of the funds.

Secret #5… Who Owns your policy

It’s 5 years later….congratulations, it’s time to renew your mortgage or to refinance to do that renovation you have been dreaming of. As a savvy shopper you find a mortgage elsewhere cheaper than what your current bank is offering you. You may be in for a nasty surprise when it comes to switch over your mortgage life insurance. Why?

Chances are your mortgage insurance is a group policy that belongs to the bank who currently holds your mortgage. You can only keep that mortgage insurance premium as long as you stay with that bank and not increase your mortgage. As soon as you refinance or move your mortgage you lose your coverage. You will have to now qualify for a new mortgage life insurance policy, and now since you are older, and since the cost of life insurance increases every year you age, there is an automatic price increase.

You may also have to qualify medically for the coverage. If you have been ill or been in a serious accident you may be declined coverage from the new bank. You then will have the choice of either staying with your current bank and paying a higher interest rate on your mortgage or going without life insurance. Since the average Canadian moves 2-3 times in their lifetime and changes banks at least twice, mortgage insurance plans will get more expensive throughout your life and will create hassles down the road.

This dilemma can be avoided with a personal life insurance policy that is not connected to your mortgage. Personal life insurance does not change no matter if you change banks, totally pay off your mortgage or move. You also have the choice of buying more insurance than just the balance of your mortgage. You can insure the loss of income to your family if you were no longer around to provide for your family.

Secret #6..Disability Coverage. Is it worth it?

Many banks will offer you disability or critical illness coverage in addition to mortgage life insurance. It appears to make sense to be covered for more than just life insurance, but is it worth it?

Disability Mortgage Insurance:

Disability mortgage insurance covers your mortgage payments for up to 24 months if you are disabled and unable to work. In order to make a claim on this policy you must be totally Disabled and unable to earn any income. If you are partially disabled and still able to earn even a portion of your income you will not qualify for the coverage. When your return to work for any amount of time your benefits will immediately stop. In addition the disability must be long term, in order for the benefits to begin you will have to be disabled for 2-3 months. Any injuries or illnesses that keep you off the job for a month or two are not covered by this plan.

For the cost of this insurance the return may not be worth it. For example, if your monthly mortgage payment is $1 750, the maximum payout will be $42 000 ($1 750 times 24 months). If you are still disabled after 24 months the coverage ends and you must resume making your mortgage payments. It does not pay off the balance of your mortgage or prevent interest from accumulating.

Many Canadians have their income covered by group insurance policies through their employer which cover about 2/3 of their income tax free. This should be enough for you to continue making your mortgage payments. If you are self-employed or without a group plan, you should look into a personal disability plan and use the premiums the bank would have charged you to offset your personal protection.

Critical Illness Insurance:

A few financial institutions are now offering Critical Illness coverage to protect your debt. Critical Illness coverage policy covers the remaining balance of your mortgage if you suffer from a named critical illness(the most common are cancer, heart attack, stroke, bypass surgery). There is a sizeable extra premium for this coverage which appears to give you extra coverage. You must consider that assuming there are 2 persons on the mortgage, you are paying for 4 different coverages with only one possible payout.

This is where the banks make their profit and cover their assets as there are only two possible scenarios. First, you and your partner remain healthy, there is no payout and the bank makes a healthy profit by pocketing the premiums. Second, one of you become seriously ill or die and the bank collects the balance of the mortgage from their insurance company. The bank has been collecting premiums for all 4 coverages (2 life insurance plans and 2 critical Illness plans), and only one gets paid out (the other three are cancelled as the mortgage is now paid off). The surviving spouse does not get to keep their life or critical illness coverage as there is no more mortgage. In effect, the extra premiums paid for the different coverage’s add to the bank’s profit 4 fold. The more of the bank’s clients pay for all 4 lines of insurance coverage the healthier their bottom line.

When comparing mortgage critical illness coverage to personal critical illness policy, you may be surprised how affordable term critical illness coverage can be. Similar to life insurance you can get level coverage for a guaranteed premium for 10 years, 20 years or until age 75 or 100. The personal critical illness coverage is not tied to either your mortgage balance or your life insurance policy. If you develop cancer, have a heart attack or a number of other major illnesses the full critical illness benefit is paid out tax free to do what you please (ie pay off your mortgage, finish your bucket list, explore alternative therapies). Your life insurance is still in force and your beneficiaries will receive the payout aswell on your death.

Final Thoughts:

In examining the coverage that the bank life insurance offers you can see for yourself how owning your own personal coverage is far superior. Bank mortgage insurance is really designed not to protect you, but rather to boost their bottom line. Consider that the bank is at risk as it has given you capital, which is at risk of you defaulting on if you get sick or die. This risk of default is the bank’s issue, but it is a basic business risk any company takes when it extends credit. The banks have found a way for the average Canadian to pay to protect their inherent business risk. The bank owns the policy and the bank is the beneficiary of the policy, but you are the one paying every month. Shouldn’t you be in control since you are the one paying the bill?

Remember, you are the client and you have the right to protect your personal financial risk with any type of insurance product you choose. Having only one option is not in your best interest. By chatting with a licensed life insurance adviseryou will be informed of the pros and cons of a wide selection of life insurance policies from different companies. Then you can make an informed choice of how to best protect you and you loved ones.

If you have any questions about mortgage insurance or your life insurance options, please feel free to call us at RW Insurance Group. A licensed adviser will be able to go over all your options.