Mortgage Insurance vs Life Insurance

You have just spent months shopping for your dream home and weeks looking for the best rates on a mortgage.  Your lender suggests taking out mortgage insurance to protect your prized asset.  On the surface it sounds like a good idea – protecting your loved ones against an unforeseen death or illness seems like a prudent decision so at the lenders suggestion you decide to tack on the premium to your mortgage payment.

Read the Toronto Star article (PDF)

The story unfolds hundreds of times each week throughout Canada and many consumers still do not realize that they are getting ripped off.  The basic premise behind mortgage insurance is sound; the problem is in most instances consumers sign up blindly not taking the time to examine their options.  Mortgage insurance through a lender does not offer the flexibility available through individual insurance policies and in most instances the coverage is significantly more expensive.

Why Life Insurance beats Mortgage Insurance Every Time

Let’s take a closer look at the some of the differences:

• Mortgage insurance with a lender declines as your mortgage declines. An individual policy remains level even as your mortgage reduces.
• Mortgage insurance with a lender is not portable. An individual policy is owned by you – you can keep it if you switch banks, move homes or pay off your mortgage.
• Mortgage insurance with a lender only pays out a benefit equal to the mortgage even if both spouses die.  Individual policies will pay out twice in the event of a simultaneous death
• Mortgage insurance with a lender names the bank as beneficiary if you die.  An individual policy allows you to choose your own beneficiary.
• Mortgage insurance with a lender is not convertible to permanent policies.  An individual term policy is convertible without a medical to a permanent policy –which provides lifetime protection and the ability to generate a tax sheltered cash value.

You would think you pay a premium for all these benefits –think again.  A 38 year old male and 37 female will pay 28 cents a month per thousand dollars of mortgage on a mortgage life insurance plan with CIBC. On a $500,000 mortgage that translates into $140 a month.  That same couple can apply with Transamerica Life for $500,000 of Individual Term 20 coverage for $98.55 a month and if they qualify for preferred rates their premiums could be as low as $71.10 a month.  That’s a savings of $9,948 to $16,536 over a 20 year period.  Not bad for a few minutes of research.  You can see the savings for yourself by emailing me at jack@lifeman.ca or requesting a quote.

The moral of the story – mortgage insurance through a lender offers convenience.  But this convenience comes at a price – inferior coverage and in most instances significantly higher premiums.