Have you bought or buying a home? The most common method for people to finance the purchase is through a mortgage.
A mortgage is the single largest debt most Canadians ever assume. Insuring this mortgage debt is very important. You are not obligated to accept the mortgage insurance offered by financial institutions.
What is mortgage insurance?
Mortgage insurance is about protecting your loved ones. If you or your spouse should die, mortgage insurance pays off your debt. It’s a simple concept, but the details in the contract vary significantly.
Mortgage Insurance through a financial institution
If you arrange mortgage insurance from your bank or credit union, you are purchasing creditor’s group insurance.
This means that you are a certificate holder. You do not own the policy. The financial institution can make changes to the coverage without your consent and the coverage terminates as soon as the mortgage is paid off. This insurance coverage is not transferable to another mortgage.
You do not name your own beneficiary. If you die, the bank or credit union receives the insurance proceeds directly.
The medical questions are very minimal when you sign up for the creditor insurance. There is no guarantee that your mortgage will be paid off by the bank or credit union. Should you die, proceeds can be denied.
The premium you pay remains constant, but the coverage amount only equals the balance of your mortgage. You pay the same amount for decreasing coverage.
For example, your mortgage is $ 825,000 when you purchase your home and the premium is $165 per month for insurance. After fifteen years, your mortgage is now $ 425,000 and you still pay $165/mth for insurance. Your insurance only covers the outstanding balance of your mortgage or $425,000, not the original amount of $825,000.
If you decide to change banks or credit unions, you have to reapply for insurance coverage. Your new rates will be based on your age at that time. If your health has changed, you may be declined and this can be a very serious issue.
In most cases, creditors group insurance is based on ‘blended rates’. Non-smokers and smokers pay the same amount for the same coverage.
Mortgage Insurance through an individually-owned policy
This Plan is obtained directly from an insurance broker.
You decide how much you want and how long you want to keep it. This puts you in control of your own protection.
The insurance amount is a fixed amount. If you arrange for $825,000 of protection and you die when your mortgage is only $125,000, your beneficiary receives the full $825,000.
You may name whomever you please as beneficiary – spouse, common-law spouse, children, parents, grandchild or friend. They receive the funds directly from the insurance company. They are free to decide whether they want to pay off the mortgage or perhaps invest the funds and use the earnings to make the monthly mortgage payments.
An individually owned policy is fully portable. The insurance comes with you when your mortgage renews or if you change lenders. You do not have to reapply for coverage and your premiums remain unchanged.
An individual policy is based on your health and lifestyle, at the time of application. Someone who leads a healthy lifestyle could pay a much lower rate for better coverage.
Are you shopping around?
These points highlight the importance of arranging the best mortgage insurance. As a mortgage may be your largest debt, it is important to have it insured. This provides protection and peace of mind for you and your loved ones.