How to Outsmart your Bank’s Mortgage Insurance

Jun 08, 2016

As a financial specialist, I deal with banks all the time and recommend their products BUT (big but) I do not generally not support their mortgage insurance.

Why?

If you’re getting a mortgage for the first time or refinancing an existing mortgage at a different institution, chances are the person across the desk is going to try to get you to add insurance to your mortgage. It is a simple as checking or not checking a box on the application, but it’s a costly, often a bad deal.
Let's get one thing perfectly clear: I am not saying you don't need to insure your mortgage, but in most circumstances, an ordinary life insurance policy is a far better deal. Here is why:

 

Cost
At the beginning of your new mortgage, you start paying a fixed amount of money every month for your bank’s insurance of it. That cost does not change over the duration of your mortgage. Sounds ok so far … BUT year after year, you are slowly paying down your mortgage yet you are still paying the same amount for your insurance.  Why is this a big deal?

  1. It is important to understand that the bank has taken out a life insurance policy in your name with THEM as the beneficiary for the amount of your initial mortgage value. If you pass away, the bank receives the money from the insurance company and then pays off the remaining amount of your mortgage. What happens when you only owe half of what you initially did on your mortgage? The bank keeps the difference. For example, if you initially take a mortgage out for $400,000 and you suddenly pass away at a point in time where you only have $200,000 left. The bank pays the $200,000 and they keep the other $200,000. You have paid the monthly cost for having $400,000 of insurance but you are not getting the benefit of what you paid for.
  2. If your monthly mortgage insurance costs stay the same but your benefit you receive from it is decreasing, you are overpaying.
  3. In addition to this, everyone pays the same cost. There are no discounts for, say, being a non-smoker or being healthy (or being a woman who will statistically live longer).

The alternative: Take out a normal life insurance policy (not one tied to your mortgage through the bank) for the initial value of your mortgage and list whomever you wish to be the beneficiary. The monthly cost to own this policy is generally lower than the bank’s mortgage insurance AND if you pass away, regardless of how much you owe on your mortgage, your beneficiary will be paid the full amount of your policy.
For example, if your initial mortgage is $400,000 and your life insurance policy is for the same amount, if you pass away and owe $200,000 on your mortgage. Your beneficiary will receive the full $400,000 and then can pay off the remaining $200,000 of the mortgage, leaving them with $200,000 of money to do whatever else they need to do with it.

Underwriting
A scary, technical-sounding word that simply means that the insurance company does medical tests and screening to determine if you qualify. Bank's mortgage insurance use "post-claim underwriting." This means that they will decide if you qualify after you pass away, at which point they may determine that you never would have qualified to have insurance and consequently they do not have to pay out your mortgage. For example, if you take out mortgage life insurance when you are healthy but 5 years later you find out you have a heart condition and unfortunately pass away a few years after, the bank can deny your claim because you have a condition that would deem you uninsurable. This practice seems terrible, but it has happened frequently.

The alternative: Use normal life insurance (not one tied to your mortgage through the bank) as they require you to undergo the medical and screening tests at the time of application. Once the insurance company grants you insurance, the status of your health is irrelevant and your policy will be paid out if you happen to pass away. 
This is a very significant and important difference.

Portability
Mortgage insurance is tied to your mortgage. If you buy another home or chose a different mortgage lender at renewal, you'll have to take it out again. A simple non-bank life insurance is not dependent on which house it covers or which bank you have your mortgage through.

So how do you outsmart mortgage life insurance?
By declining it when the bank asks you about it (which is at the time you are signing the actual mortgage documents). Then simply contact your life insurance agent. This life insurance is not tied to your mortgage and you can click here for more information on it.

Most home buyers assume that by getting the bank’s mortgage insurance it will help with their mortgage application and they don’t realize they could buy coverage elsewhere. So many people still think that their mortgage offer is conditional on buying their lender’s home insurance, and that a significant minority are essentially in a mortgage-linked insurance trap – believing that switching away from their lender’s insurance will invalidate their mortgage.

Is mortgage insurance always bad?
No, it isn’t. Sometimes mortgage life insurance is a good idea. For example, if you have a condition or illness that might make it difficult or impossible to get life or disability insurance separate from your mortgage.

 

Here are some other great references:

CBC video
Financial Reporter article
The Toronto Star article

 

Want some more information? Send us an email or give us a call and we can help you at info@savanti.ca or (403)968-8443



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