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9


Reasons Why You Should Get Term Life Insurance Instead of Mortgage Insurance

 Getting insurance in place to make sure the family keeps the home is a wonderful idea, Mortgage Insurance is “SUPPOSED TO” do that, but it may not. This means your family could lose a loved one and their home. This article will help you understand that you can get the peace of mind you want through Term Life Insurance. Here are 9 reasons to get term life insurance instead.

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Get Better Protection For Your Family

While Saving Money
Term Life Insurance Is better than mortgage insurance

Article Summary:

Get Better Protection For Your Family

While Saving Money

Let's Start with the Basics

Buying your home is likely the biggest financial transaction of life. It’s likely the biggest asset in your wealth, it’s certainly the biggest liability for most people.

 

Very few are lucky enough to be able to buy a home without taking out a mortgage, especially with the skyrocketing costs of homes in Canada. 

 

The typical steps in the first time home buying experience revolve around you, the realtor and your bank. 

Your mortgage broker or your lender can typically get you a “soft” approval based on your credit, income, current employment and existing debt loads. 

Before realtors take their time to help you in your house hunt, they typically want to know; how high your budget is, some, won’t even consider working with you without a pre-approval letter.  

 

While your lender works hard to get you the biggest loan possible, the realtor tries to find you the biggest home within the approval limit. 

 

This could be a long process for most, requiring multiple appointments, home showings,  tonnes of document follow-ups and filling up forms you’ve never seen before.

 

Add all that with the excitement of the furniture and decor planning, the last thing you’d want to do is talk about insurance and numbers, after all, those nights watching HGTV is about to pay off!

  

With this excitement, you’d likely just initial and sign on marked documents without even glossing over what you are signing up for. (That’s how majority client’s I’ve met have purchased their mortgage insurance, most of them think this is just part of the mortgage and fees.)

Before you go any further, MORTGAGE INSURANCE and MORTGAGE DEFAULT INSURANCE ARE NOT THE SAME.

Default insurance is a legal requirement for Canadian homebuyers who are putting down less than 20% down-payment on their home or have less than 20% equity in the home being financed.

This is in place in case the borrower (you) fail to repay the loan. Mortgage “life” Insurance is designed to pay off the loan if the borrower dies before the loan is settled.  

On the surface, mortgage insurance may sound like a great Idea. But, BOTH OF THESE ARE DESIGNED TO PROTECT THE BANK. 

With that, let’s break down the reasons why you should opt-out of your mortgage life insurance and get a personally owned term insurance instead.

1. Coverage is Reviewed after the claim

Before I give you the scoop on why that’s terrible for you, let me start with this question:

How easy do you think it would be for you to defend yourself and your rights if you’re dead?

I assure you, that is not one of my attempts to be funny. (though my dad jokes are a solid 7 out of 10)

Insurance works because of risk-sharing and pooling. Insurance companies collect premiums and finance your risk and rely on the fact that not everyone who paid premiums will file a claim. The companies profit if there are more premiums than paid claims. if more claims are paid out than premiums collected, the company will run losses and go out of business. 

When you get an insurance policy, whether for your car, home or life, you have to go through underwriting, this is the process insurance companies use to check if the risk you want to insure is viable (profitable) for them, This is sound practice since, they don’t want to lose money.

When you apply for mortgage insurance, the application you filled up while drunk on the homeownership rush is not processed for underwriting, not until you’ve had a claim. Mortgage insurance providers do this because underwriting administration is expensive. They follow a procedure called claims based underwriting, they’ll check the validity of your contract and application is after you’ve passed away. 

So imagine this situation.

 It’s the 2019 NBA play off’s you and a buddy make a $100 bet on who will take home the championship. You bet on the Raptors, they bet on Golden State. 

Fast-forward to the last game, Toronto wins. So you win the bet. But instead of paying up, your buddy now says, you betted that Raptors would win in 4 games, and it took them 6 games…

My daughter calls that a “TAKES-Y-BACK-SY”

That’s what claims based is. 

This has been such a cause for concern that numerous news outlets have written about this issue. CBC’s The Marketplace released a documentary called. “In Denial -Mortgage Insurance Canada.

The biggest cause for denial of claims is typically misrepresentation of the applicants.  

What if the misrepresentation was not intentional?  Is it possible that the applicant’s simply rushed through questions and made mistakes? after all the common applicants for mortgage insurance are not financial experts, nor are they fluent in insurance lingo. Unfortunately, in most cases, neither are the mortgage brokers and loan experts who helped them fill out the documents. Most of them are not licensed to sell or advice on life insurance matters, they may not have the capability to explain and clarify these for the clients either. 

We are talking about one-page documents that are supposed to check if you are insurable. It’s filled with broad questions, but somehow, all the answers are yes or no.

This alone should highlight the risk you are exposing yourself and family to. 

When compared to a term life insurance policy where underwriting is done upfront, you know that you are approved and you hold strong proof that you’ve met the terms. So, no take-backs. 

 

2. You Don't Own The Policy

Most likely, you’ve bought your house because you are tired of renting.

You know, be the owner of your domain and whatnot.

So it may be a surprise to you that your mortgage loan insurance is owned and controlled by the LENDER. Not you.  Ultimately this means lack of control.

You’ll see why this is important. For now, understand that you are not the owner of the policy and they can change the terms and the price, even after you’ve paid for a few years into the policy.

With a personally owned life insurance policy, you can choose:

  • Who’s life is insured. (Insured)
  • How much the insurance coverage is. (Face Amount/ Death Benefit)
  • Beneficiary (Who receives the death benefit)
  • Length of Coverage ( Term)
  • Type of Policy (Whole Life, Term or Permanent).
  • How the benefits are distributed.
 
With a mortgage insurance policy, since you are not the owner, and it designed heavily to favor the lenders, YOU CANNOT DECIDE ANY OF THAT.

 

 

3. The Payout Goes Directly To The Lender.

Assuming that the claim is not denied, if you passed away while covered under a mortgage insurance policy, the bank is paid directly. They are beneficiaries, not your spouse or children. So the beneficiaries have no choice on how the insurance is used. There are scenarios where paying off the home may not be the most prudent financial decision.

Asset Protection and Growth

Another thing to consider that goes beyond basic coverage is asset protection Life Insurance proceeds is creditor protected, unlike the home. This may not be a big concern for everybody, but it should be considered by those who have significant wealth or are building wealth through real estate or business ventures that require capital from lenders or investors.

If you passed away with loans and liabilities, this must be settled by your estate before your heirs receive their inheritances. your assets must be liquidated if there is not enough cash to pay these liabilities, including the home that was paid off through mortgage insurance.

However, the death benefits from an insurance policy are creditor protected and tax-free. This means the CRA or your creditors can claim on the house but not the life insurance proceeds.

The flexibility of controlling the funds trumps having a paid-off home. Even if there are no creditors or tax liabilities, if you or your spouse pass away, the survivor has the choice to keep the mortgage and pay it off over regular amortization schedule. Ultimately this has to be weighed out by your financial advisor, specifically if the loans are co-owned and co-borrowed. In that situation, the surviving borrower will be responsible for the full loan balance.

If your spouse received the life insurance benefit, they have the choice of keeping the loan and paying it off monthly and re-investing the rest, this may make sense during low-interest-rate environments because they are likely to earn more investing compared to interest savings on the mortgage.

Your Policy; Your Choice.

I am sure that just like me, you too would prefer to give your family every advantage available to you and your resources. However, it may not be wise for you to leave them with full access to your estate or cash proceeds. This may be due to lack of experience with money or lack of capacity due to age or infirmity. If you believe that one of your beneficiaries won’t be fit to handle their finances, you can arrange an annuitized policy disbursement, where they will get a monthly or annual benefit instead of a lump sum. For those who are simply too young, or is disabled, insurance policies allow you to choose a trustee who will help them manage their finances effectively until they are 18 or until necessary for those who are handicapped.

 

 

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4. Your Benefits Go Down Over Time.

Mortgage insurance is designed for one thing, compensate and protect the lender if the borrower passes away and defaults on the loan. Just as the CHMC default insurance is designed to pay them back if you become delinquent and fail to pay the home. 

IT ONLY COVERS THE OUTSTANDING BALANCE

When you get insurance through your lender they are only insuring the loan balance, naturally, this gets lower over time as you continue to pay down the principal. Let’s take a look at what that means to you.

In June 2019, according to the Canadian Real Estate Association, the average home price for Alberta is $386,012. With the national average being $505,463. While the average mortgage my life insurance clients have covered fall between $400,000-$500,000. 

Take look at a $400,000 purchase with the minimum downpayment of $5,000.

I pulled up the payment schedule using ratehub.ca’s mortgage calculator.

  • After paying the mortgage default insurance of $15,200, the net mortgage amount on day one is $395,200
  • The assumed interest rate of 3.00% amortized (paid over) 25 years.
  • Monthly Payments of $1870.
After paying for 10 years. The outstanding balance of the loan will be roughly $270,000.

If you insured that through your lender’s mortgage insurance policy, they would simply pay off the $270,000 if you passed away that year.

Term Life Insurance Pays the Full Death Benefit covered.

So what would it look like if you insured this using a term life insurance policy instead? 

To cover the initial loan, with term insurance you would have taken out $400,000 policy with a 25-year term. This means anytime during the 25 years, your family (or chosen beneficiaries) will receive the $400,000 if you passed away. They can then use that to pay the mortgage off, or whatever else for that matters.

This means, that if you passed away on the 10th year as our previous example, they would receive the $400,000. They can then pay off the mortgage and still have a $129,000 excess which they can fully control.

Why would you pay the same premiums for reducing benefit?

With the $400,000 home example, your mortgage insurance benefit would have decreased to $270,000 (or the outstanding balance) but you are paying premiums for  $395,200. In effect, your policy actually becomes more expensive over time.

   

 

5. Your Mortgage Insurance Does Not Move With You.

Most mortgages are amortized over 25 years but the agreements between you and the lender are typically locked for 1,3,5 or 10 years. This locked period are called terms. These terms will typically dictate the rates charged, penalties and portability options. 

According to James Laird, one of ratehub.ca’s co-founders, even though the most common term taken is 5 years, the average Canadian, only keeps it for 3.8 years. 

The main reason behind this is changing lifestyles which would require a down-sizing or up-sizing of the home. However, there are some other factors which could lead to this, such as:

  • Reduction of interest rates made it reasonable to re-finance and pay less in interest and lower monthly payments.

  • Accessing Equity after the home has gone up in value.

  • Removing a loan participant. It’s very common for family members to co-own/co-borrow to purchase a home. What happens when you no longer want to be on the mortgage with your kids or vice-versa. This would typically mean getting a new mortgage and new term. 

If you change lenders, mortgage terms or refinance, you would need a new mortgage policy. 

This means, re-doing applications and attesting to new health-related questions. This is fine if you know with absolute certainty that you will always be in tip-top shape and will never get ill or involved in an accident.

Life is full of uncertainty if your health condition is less than favorable you may no longer be qualified for that new mortgage insurance coverage. 

Term Insurance Moves with you.

Remember that lenders own the mortgage insurance policy, this means if you move to one of their competitors, they won’t extend the coverage. Compared to term insurance, you would have full control and the coverage will stay in place. I would urge you to review if you still have enough life insurance if you move to a bigger home and take out a bigger loan, but if the new mortgage is to simply take advantage of lower rates and keep the same repayment timeline, then you would be fine with the old term policy.

 

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6. You Are Over Paying, In More Ways Than You Think.

When you apply for the mortgage insurance policy, they use a simplified pricing table. This pricing table calculates the total cost per $1000 of insurance

 This means the price you are paying is not tailored to you. This is the mortgage insurance premium calculation used by most lenders:

  • Look at the rates below
  • Multiply it by the total mortgage at the time of application.
  • Divide it by 1000
  • Apply discounts 

Age Group TD CIBC RBC BMO SCOTIA
Under 30 $0.13 $0.08 $0.09 $0.09 $0.11
30 to 35 $0.17 $0.13 $0.13 $0.13 $0.15
36 to 40 $0.24 $0.20 $0.20 $0.20 $0.22
41 to 45 $0.32 $0.29 $0.29 $0.29 $0.33
46 to 50 $0.46 $0.43 $0.40 $0.41 $0.44
51 to 55 $0.56 $0.64 $0.52 $0.55 $0.55
56 to 60 $0.79 $0.90 $0.70 $0.70 $0.74
61 to 64 $1.06 $0.97 $0.95 $0.99 $1.09
65 to 69 $1.66 $0.97 $1.63 NA $1.54

*most have discounts on joint coverages and joint applicants.
*Rates are taken from public-facing disclosure and certificates and are subject to change click on each lender to see the full documents.

 

 What’s wrong with this mortgage insurance formula?
  • It’s not tailored to your Gender: Men usually pay more than women do.
  • It’s not tailored to your age: Notice that it is in 5-year bands, while anyone under 30 is the same rate. Why would you pay for a 35-year-old’s rate if you are 31?
  • Not tailored to smoking status: This makes the price per $1000 more expensive since the additional premium for smoker rating is “baked in” to the pricing.
  • Not tailored to your lifestyle and health condition.  I already mentioned the simplified underwriting above. The problem this creates for pricing is that everyone in the age band is charged the same price, no discounts for being healthy, or having a great lifestyle.

Take a look at this Price Comparison.

Assuming the same $400,000 home was purchased and the borrower is 35 years old. 

1.)The lowest rate is for $.13

2.) $.13*395,200 = $51376

3.) $51,376/1000= $51.38/mo 

How does that stack up against term policies?

Look at the table below for standard-rated policies* 

 

Term 25 Insurance$400,000
MaleFemale
$43.20$33.34
Mortgage InsuranceLoan Balance
MaleFemale
$51.38$51.38
Savings Per Month 
MaleFemale
$8.18$18.04

This becomes even more substantial when you are fit and live a great lifestyle. Look at the ratings for preferred plus (low-risk clients for insurance companies).

Term 25 Insurance$400,000
MaleFemale
$33.19$26.35
Mortgage InsuranceLoan Balance
MaleFemale
$51.38$51.38
Savings Per Month 
MaleFemale
$18.19$25.03

*Pricing pulled as of Aug 1, 2019. 

The declining coverage.

You are paying for coverage that reduces benefit without a reduction in premium. This means your policy is actually becoming more expensive. IF you like the declining coverage idea, you can always reduce your benefits with term policies, though my clients don’t do this. They like the idea that the beneficiaries receive more net of paying the mortgage.

The rates above are not guaranteed but term life insurance is.

 They can change the rates and only give you 30 days notice. Term life insurance gives you a guaranteed price for the whole term.

 If you are curious how much it would cost for you, get a quote here.

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7. You May Be Declined With Mortgage Insurance But Approved With Term Life Insurance.

Remember the simplified application process for mortgage insurance? Most of the questions are designed for “yes or no”.
Simple for healthy clients.
But what if you had any kind of pre-existing condition?
Most likely, the application form will indicate that you are not insurance, without any review from an underwriter or insurance expert.

Term Insurance can still cover you.

Even if you have been declined with mortgage insurance or another insurance carrier in the past, you still deserve insurance.
Your family deserves peace of mind.
That’s why we have worked with insurance carriers in seeking specialized policies for clients who have suffered from health complications.

This includes:

  • Cancer Survivors
  • Heart Attack Survivors
  • Diabetics
  • Stroke Survivors
  • High-risk occupations
  • Weight Issues
  • COPD
  • Sleep Apnea
  • Many More
 
We were able to do this because of our deeper understanding in insurance requirements, carriers’ reception and understanding of risk.
 
So if you believe you can never get insurance, let us check into it.

8. You Can't Trade It In For an Upgrade

Term policies can be traded in for a longer-term or permanent policy. 
This is crucial because your finances and goals may change over time.
Right now, your focus may be on getting as much coverage for the lowest price possible (which we can help you do).

Later on, in life, your priority may go towards maximizing your wealth and estate, life insurance can be established as a separate asset class.

This may not apply to everybody but if you are serious about building wealth, permanent life insurance satisfies multiple financial problems.

having the option to turn your insurance policy into a cash-value building machine may come in handy for:

  • Leaving an inheritance 
  • Tax minimization
  • Supplementing your retirement income
  • Collateral for Business use
  • Accessing cash inside a privately held corporation

Mortgage Insurance is a one-trick pony, a trick it may not do very well.

9. Mortgage Insurance Only Covers People On The Loan. (Insurable Interest)

One of the basic rules of any insurance is that the benefit is designed to compensate for losses, not to generate profit for 3rd parties. 

This concept is called insurable interest. This is the same rule that prevents you from buying life insurance that insures your neighbors. (despite what Hollywood and crime shows may make you believe.)

So the lenders cannot own a policy insure anyone who does noes not have a loan with them. 

This is important for the overall family plan if there are other contributors to the mortgage but is not on the loan.

Case Study (real clients, names and occupation are altered)

Harvey and Donna are recently married and want to buy their first home. Donna makes a great income as a consultant while Harvey is finishing his accounting degree and is already employed by an accounting firm.

Because of previous YOLO(all fun) living, Harvey has a less than desirable credit. They have been advised by the mortgage professional that they should not include him on the loan application.They listened.

In this case, Harvey is not insured under the mortgage insurance the mortgage broker is offering.

I was able to help this couple get sufficient life insurance to cover the mortgage and everything else in their life because of the financial dependency between the clients.

When applying for life insurance couples can include liabilities they have incurred independently. In the case, even though the mortgage was not being paid from Harvey’s bank account, he was still contributing to its affordability. Donna would not have been able to keep the place without him and his income.

What To Do With All This Information?

Summary: Mortgage Insurance sucks! It’s designed to protect the lender.

Action Item:

Option 1: Do nothing, choose to leave your family with uncertainty.

Option 2: Keep Reading.
You should shop around, talk to your financial planner or insurance broker if you already have one. Make sure they have more than 2-3 insurance companies in their arsenal so they can give you the best rates. If you don’t have a CFP or an Insurance Broker in your corner, feel free to use this quote system to check if you’d save some money

Please share this with your friends and people you care about. Don’t share it to people you don’t care about 😉 

If you have any questions contact me through the form below.

If you are an agent: 
Feel free to use this article as a resource for your clients. if you have any questions, contact me using the form below.

Protip: Before making any changes, consult a licensed professional. Make sure you understand that the new policy is indeed better than the old one. This means checking the guarantees and asking tough questions. 

Make sure you have an approved policy before you make any changes to the old coverages especially if you have any health complications.

Make sure that the new policy is indeed better do not just look at the price. If you look at quotes online make sure you are checking for a 25-year term, but if budget is tight, a 10-year term will do, as long as the policy offers the option to swap out.

I gave you the tools to decide what’s better for your family. Yes, I have a biased view, but I backed everything here with proof and 3rd party citations. 

Any thoughtfully put together coverage is better than leaving your family with no protection. If you still believe that you are better off with mortgage insurance, as long as you are aware of the choices, and the key differences, I am happy to know that you have coverage.

Disclaimer: This information is for education and entertainment purposes only. Do not take it as personalized financial, legal, tax or investment advice. Always consult with your advisor. If you don’t have one, you can book a consultation with me through the contact info below.

Get In Touch

(403) 472-6949

available from 10:00 – 19:00

Address: 328 1210 8th Street S.W Calgary, AB, T2R 1L3

TERM or PERMANENT?

TERM

PERMANENT

What is it?

Temporary protection (limited time)

Life long Protection Can Accumulate Cash Value Used for Estate Planning

Who is it for?

Young Families and Mortgaged Homeowners

Long Term Focused Individuals

People Looking Beyon RRSP and TFSA

What is it?

Cheap to START
Get lots of insurance.
Simple

Guaranteed Premiums For life. Later in Life, Cheaper than term. Opportunity for tax advantaged cash value growth.You can borrow against the policy

What is it?

Coverage ENDS The Cost Increase hurts after renewal No Cash Value

Expensive for younger people compared to term. Not as simple due to tax and legal implications.

What is it?

When Younger When Needs are temporary ( mortgage, kids being dependent)

Later In Life When the Cash Value becomes substantial. 
Highly Taxed individuals.