If you recently purchased a new home or refinanced your lending agreement, then there is little doubt the topic of mortgage insurance has come up. Whether broached by your partner, financial advisor, or lender, it is generally agreed you should protect your home and your family that lives in it against future financial hardship. After all, it is what most Canadians consider their largest asset.
So, how do you do it? A seemingly obvious answer is mortgage insurance, which has most likely already been offered to you by your mortgage lender. While it sounds like exactly what you need, there is more you should know about how mortgage insurance works, related products like mortgage default insurance, and a less expensive way to protect your mortgage that offers you even more security.
What is Mortgage Default Insurance?
Mortgage default insurance (or mortgage loan insurance) is a mandatory insurance policy that your lender requires you to pay for when the amount of your down payment for a newly purchased home is above 5% but less than 20% of the final cost. This insurance protects the lender in case you as the borrower are unable to make your mortgage payments for any reason. Canadian mortgage default insurance is offered by three entities: Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Genworth.
It offers no protection to you, your estate, or your dependents should anything happen to you and is designed specifically to protect lenders that offer mortgages to those who elect to make a lower down payment.
On the other hand, mortgage insurance is a product you can choose to purchase to protect your home should something happen to you
How Does Mortgage Insurance Work?
Mortgage insurance is an insurance policy, typically offered by your bank or lender, that pays off the mortgage should you pass away while the principal on the loan is still outstanding. A mortgage insurance policy requires a fixed cost payment by you – the borrower – to cover a reducing mortgage debt until the mortgage is paid.
While this may sound like exactly what you need at first glance, mortgage insurance premiums can be exponentially higher than other forms of insurance because they are not medically underwritten. What this means is the insurer is taking on the risk of insuring your life without checking out your current health profile to see how much risk is involved in doing it. For insuring you in this manner they charge you an elevated premium.
Thus a supposed advantage of bank-offered mortgage insurance is you qualify instantly without a medical exam. The caveat is that mortgage insurance is not a guaranteed coverage, but underwritten when filing a claim. Your estate might find out after your death that you weren’t covered as well as you thought or maybe not covered at all. Besides the unfortunate circumstances around an early death, having to deal with the duress of further investigation into that death is stress your loved ones do not need at that time.
Fortunately, there are alternatives to traditional mortgage insurance that can do a much better job of protecting your home. As mentioned, mortgage insurance entails a fixed cost payment that covers a diminishing mortgage debt for your financial institution until the mortgage is paid. The alternative to mortgage insurance is mortgage protection through term life insurance. It can better protect your investment and the life you’re building for your loved ones.
How do I Insure and Protect my Mortgage the Right Way?
Mortgage protection through term life insurance (or mortgage life insurance) offers a lot more flexibility than traditional mortgage insurance. Term life insurance can be tailored in a way to make certain that families can pay off the mortgage balance and also provide coverage for many other needs in the unfortunate circumstances that an income earner passes away. Typically, you can choose between a range of terms such as 10-, 15-, 20-, 25-, or 30-year terms to closely match the length of time you have left to pay off the mortgage.
Generally, you would buy enough mortgage protection coverage to pay the balance of your mortgage. According to this CBC article, an average Canadian homeowner owes about $200,000 on their mortgage; StatsCan says it is closer to $180,000. Regardless, mortgage protection through term life insurance can make sure a surviving spouse and children will be able to keep the family home in cases like these, even if the homeowner dies unexpectedly.
With term life insurance you also get flexibility. You have the option to calculate an insurance policy with a death benefit larger than your mortgage to cover other such obligations as your child’s education, other debts, and living expenses for survivors.
So Why Even Consider Mortgage Insurance?
There are some circumstances and edge cases where mortgage insurance makes sense. As it is offered by the lender, a homeowner will pay for it when they make their monthly mortgage payments. What one must ask themselves: is this small convenience worth the extra thousands of dollars you’ll pay for this protection throughout the life of your mortgage?
When looking at mortgage insurance and its alternatives, always remember that you save money and receive better coverage in the long term if you simply protect your mortgage through term life insurance. It’s the right way to insure your mortgage if you are willing to go through the underwriting.
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