This post was made in September 2019 and is specific to Canadian policies and information. It is intended solely for the personal non-commercial use of the user who accepts full responsibility for its use. While I have taken precaution to ensure that the content of this site is both current and accurate, errors can occur.
The information contained in this site is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases you should consult with professional advisors familiar with your particular factual situation for advice concerning specific matters before making any decisions.
Let’s go ahead and start this from the very beginning. What IS mortgage insurance?
Mortgage Insurance helps you pay off your mortgage if you pass away. It could also pay your monthly mortgage fee if you’re not able to work for a period of time. It’s an optional coverage that you’d buy either through the bank when you get your mortgage or through an Insurance agent. If you’re familiar, Mortgage Insurance is like Term Insurance.
No one wants to think about it but, if you pass away, who will pay your mortgage?
If you’re single, the bill will probably go to a family member who would, likely, have to cover your mortgage payments until they’re able to sell your home. If you’re married, will your spouse be able to cover the mortgage and all other expenses without your income? Will they need to take time off of work after you pass? In that case, your family would lose both incomes until your spouse is ready to go back to work. Keep in mind, your payments will still be required if you’re not able to bring home a paycheck!
And that, my friends, is what mortgage insurance covers.
So, what’s the difference between buying from the bank vs. an insurance advisor?
Insurance from the bank is typically more convenient. It (usually) gets taken out of your account with the mortgage so you don’t have to think of an extra bill payment. Also, you can sign up for it as you’re dealing with the mortgage approval.
While personal insurance doesn’t offer those conveniences, it has plenty of other benefits you need to consider. To start, you’ll know what you’re covered for before you make a claim. When you buy an insurance policy, it goes through Underwriting. That’s a process where a professional looks at your application, medical history, etc. and decides if the company will issue you a policy. You can be approved or denied. Or, you could be approved except for XYZ – meaning you’re covered, UNLESS you pass away from a returning illness, hereditary health conditions, etc.
You want them to do this when you apply to give yourself options before you need to use the insurance.
On the contrary, Mortgage Insurance offered through a bank is, generally speaking, a simple questionnaire approving most people on the spot. However, they’ll wait until you make a claim before they send it to the underwriter. That means you won’t know if there’s an exception to what you’re covered for until it’s too late.
With personal insurance, you own the policy. You keep it even when you move or pay off your mortgage. It’ll pay the Life Insurance Benefit directly to your family (or estate) if you pass away. Your family can use the money to pay off the mortgage or chose to split it between the mortgage and another unforeseen expense.
Life Insurance through the bank will be paid directly to the bank and used to pay off your mortgage.
You’ll typically get comparable rates for an Insurance Policy from the Bank as an Insurance Agent.
There are plenty of other things to know about mortgage insurance (good and bad) so I suggest sitting down with a professional to ask questions before you chose a policy. Always make sure you understand what the contract says. If your situation doesn’t match the criteria and definitions in the contract, you will not be paid out.
These are some good questions to ask:
- If/When I pass away, who will the money go to?
- Does the benefit ever change?
- If I’m too hurt or sick to go to work (make an income) for a period of time, will this plan offer me any benefits?
- If the answer is yes, ask what the “Definition of Disability” is. You’re essentially asking, “How badly do I have to be hurt before they’ll pay me?”
- Ask how long you’ll have to be off work before they start to pay you.
- Who is covered under this plan? If you and your partner buy a home, it may be only the Primary Applicant who’s covered. But what if something happened to the other partner?
- If I make changes to my mortgage, will this policy be canceled, or will it move with me even if I change lenders?
- When will they decide if I qualify for the insurance policy I’ve chosen?
I realize that question sounds redundant but many policies, especially the ones with few questions and approve you right away, aren’t looked at by the Underwriter (the person who decides if you qualify and what the insurance company will cover you for) until you’re asking for the money i.e. making a claim. This is a very important question.