'Mortgage' insurance vs Term Life insurance

I have written many articles on this topic and every time I do, it seems to be a hit.

People always ask for more information and as shocking as it may seem, there still isn't enough public awareness around the conversation between ‘mortgage’ insurance and term life insurance aka the true solution for insuring your mortgage.

To start off, let's just begin by saying there is no such thing as ‘mortgage insurance’. It is creditor insurance, labeled and marketed as ‘mortgage’ insurance.

‘Mortgage insurance’ does not exist.

You're simply buying a type of insurance for the financial institution lending you money to buy your home. So, we need to stop calling it ‘mortgage insurance.’ We need to start calling it creditor insurance.

The first thing to be aware of with creditor insurance is the fact that your family is not the beneficiary. The bank or the financial institution is the beneficiary, hence why it's called creditor insurance. You're paying for insurance to insure the bank instead of insuring your family. I'm not sure if you're aware of that, but you're certainly not buying ‘mortgage insurance’ for the benefit of your family. You are insuring the lender who loans you the money to buy the house.

The second point is whatever you're paying per month for this creditor insurance, will never decrease, despite the balance of your mortgage decreasing every single month. Let's say your mortgage is $700,000 and for simple math, you're paying $80/month for the creditor insurance. You are always going to be paying $80/month no matter what the balance of that mortgage decreases too. If your mortgage starts at $700,000 and goes down to $600,000, $500,000, $400,000, etc. you're still paying that $80/month. Your premium does not decrease with the decreasing mortgage. It's a little counterintuitive, you would think at a minimum, the cost of the insurance would reflect the outstanding debt, but it doesn't. Your premiums do not change or decrease although your mortgage is going down.

The third point I want to make is underwriting is done at time of claim, not at time of application or approval. This is a very serious point. If you were to pass away, that is when the creditor would underwrite your health and go through an extensive health history. Perhaps you forgot to tell them you had a major health issue and maybe they wouldn't have approved you. If this happened, they might deny the claim. If you Google this, there's a lot of articles around this and scenarios that have unfortunately happened to families thinking they had the coverage but when one of the parents passed away, it turns out that they were denied the claim. It's a very scary thing to think you might have this coverage, and you could pay for the next 10 or 20 years and then you're not even covered.

The fourth point I want to make is something called portability. Portability really means that if you get creditor insurance, it is attached to that mortgage and essentially to that home. If you were to sell the home and move or change banks, there's a good chance you're going to lose that insurance and have to get new creditor insurance. This means you're going to be older and it's going to cost you more to get new insurance. This insurance isn't portable with you as you move or change banks.

So the million-dollar question is what's the alternative? Well, I wouldn't even call it the alternative, I would call it the right thing to do, and the right thing to do is to buy a term life insurance policy.

First and foremost, with a term life insurance policy, your family is the beneficiary. It is not the bank, it is not the financial institution, it is your family who will benefit financially or at least would be covered financially if something were to happen to you. A tax-free lump sum payment would be paid to your beneficiary, not the creditor. So that's a good starting point.

The second point is about the premiums of term life insurance. Yes, they do remain the same, but the coverage amount also remains the same. If you had that mortgage of $700,000 and you get a $700,000 term 20 term life insurance policy, you're insured for $700,000 every single year for 20 years. Your premiums don't change for 20 years but the balance of your mortgage is still being paid off as it would have if you had creditor insurance. If your mortgage starts at $700,000, and goes down to $600,000, $500,000, and all the way down to $0, but your coverage is still for $700,000, you're now creating a very healthy gap between the balance outstanding and what the payout is going to be. If you were to pass away when the mortgage is $400,000, but you still have that term 20 for $700,000, well $700,000 is paid tax-free to your family and they could pay off the mortgage and still pocket another $300,000. The funny thing is, if a parent were to pass away, it doesn't always make sense to rush and pay off the entire mortgage. There are a lot of circumstances and variables that would affect whether that's even the right thing to do. Having a tax-free lump-sum payout in cash is a massive benefit to term life insurance because the family can now sit down with their life insurance advisor, their financial advisor, their accountant, their lawyer, etc. and go through what the best use of this money could be.

The third point is the fact that underwriting is done at time of approval. If you go to buy term life insurance, depending on the amount, you might be able to get it without having to do medicals or any blood work. But, you're going to answer a lot of health questions to make sure the insurance company will approve you. If you get approved, a payout on your death is guaranteed, assuming you didn't lie on the application. Now, you don't have to be concerned that if something happens in the future they're going to look back and catch something and maybe deny you.

The fourth point is about portability. You own this term life insurance policy. You are the life insured, you are the payor, your family is the beneficiary and it doesn't matter if you move or change banks. You're always going to have this insurance, no one can take it away from you.

If you have creditor insurance on your current mortgage, if you have multiple properties, please look into if you took this creditor insurance. Sometimes people have it and don't even realize it. If you did, I would really encourage you to get term life insurance instead. It's much better for you and your family.

Thanks for reading,

Michael Dutra, TEP, CLU, CFP

Chief Executive Officer?

905 320 5399

Michaeldutra.ca

[email protected]

Disclaimer: This article will contain strategies, concepts & illustrations and is intended to be a source of information, but not a substitute for independent legal, tax and accounting advice.

Personal details need to be obtained and a thorough review of all concepts before implementing any of them.

This material has been prepared for informational purposes only, you should consult your own tax, legal and accounting advisors before implementing any transaction.