I remember years ago when my wife and I first began to think about buying our first home. We talked about what we wanted in a home, where we would look, and our target home value. We talked about the number of bedrooms, general layout, kitchen and bathrooms, and of course the important stuff … like the garage and yard. Once we found our “dream” home (the one we could ‘barely’ afford) we began to talk about furnishing the home, paint colors and flooring. We had talked to the bank about getting pre-approved for a mortgage. When we went to formalize the mortgage details and sign off on the mortgage, there was one more item that came up that was totally unexpected.
The mortgage officer advised us that the bank wanted to make sure that if something happened to us, that “we” would be well cared for and that mortgage insurance would allow the mortgage to be paid off. We were young and newly married. We had no need for insurance and had never given it any thought. I cannot even remember if the mortgage officer of the bank told us what the cost would be, or how the bank’s mortgage insurance worked. We simply signed the documents because frankly, our focus was on the purchase of our first home… everything else seemed secondary. I have come to realize that this scenario unfolds with the majority of home buyers.
Years later, when I was first licensed as an insurance broker, I began to look in more detail at mortgage insurance offered by Canada’s home lenders (the Banks). The reality is that this is a good deal for the mortgage lender, but not such a good deal for the home owner. After spending so much time comparing location, community, schools, layouts, kitchens, and bathrooms, how come purchasers spend so little time assessing their insurance options? The idea behind mortgage insurance seems reasonable enough until you compare it to personally owned life insurance.
A recent review of a major Canadian Bank’s mortgage website took some searching to find details about mortgage insurance and the costs. According to one website “Your cost of insurance is based on your age when you apply and the amount of your mortgage. Your premiums will not increase as you get older†. It is comforting to know that this important coverage will remain affordable.” What they have not said is that the cost of insurance (the premiums that you pay) will remain the same, even as the amount of insurance declines (as you pay down your mortgage). What kind of “comfort” is that? How is this “affordable”?
There are critical differences between mortgage insurance offered by your lender and insurance offered through an insurance company (please see table at the bottom of page 2).
Insurance should be used for your purposes, not for the bank’s benefit. If your family and beneficiaries have other sources of income to continue to pay the mortgage, or simply want to use the insurance proceeds to continue to make mortgage payments, they should be able to decide what is best for them. Imagine the pain of not only losing a loved one, but realizing that while the mortgage may be paid off, your beneficiaries cannot afford to pay property taxes, or afford to pay the operating expenses for the home.
In the vast majority of cases that I have advised clients on, the purchaser of personally held insurance could buy more insurance, enjoy a lower annual cost, and have the benefits of owning the policy regardless of their mortgage or bank relationship. Term insurance is often one of the most affordable means by which to buy insurance. A recent review of two of Canada’s leading mortgage lenders websites identified their mortgage insurance rates. A comparison to personally owned 10 year term insurance rates is as follows (example only):
1. If you already own a home, and have mortgage insurance, look at your mortgage statement and find out how much you are paying in mortgage insurance premiums. Allow us to investigate personally owned insurance options, costs and benefits.
2. If you know someone who is considering buying a home, ask them if they have been pre-approved for a mortgage. At the same time, ask them is they have personally owned insurance. If not, you may be able to help them save hundreds of dollars annually and shorten the time until they are mortgage free, by giving them this summary.
3. Review your total life insurance need. Life insurance is more than just covering off your debts and paying taxes. It can provide your family and loved ones with the needed capital to offset the loss of income, accomplish goals and objectives that were important to you, and provide financial security when it is needed most.
Differences between mortgage insurance offered by your lender and insurance offered through an insurance company: