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Mortgage protection insurance is one of the most important types of insurance that you can buy to protect your loved ones against losing their home. It provides financial protection in the event that you are unable to make your mortgage payments due to illness, injury, or death.
In this article, we will discuss what mortgage protection insurance is and how it works in Canada. We will also compare individual mortgage protection life insurance to bank mortgage protection insurance, and explain why an individual policy is a far better option than the one you usually get from your mortgage lender.
What Is Mortgage Protection Insurance And Who Does It Protect?
When you take out a mortgage, the lender will often offer mortgage protection insurance. This type of insurance is designed to protect the lender in case the mortgage holder or the mortgagor passes away or becomes incapacitated during the term of the mortgage loan wherein the family may no longer be able to afford the mortgage payments.
While this kind of mortgage protection insurance does offer some peace of mind to the family, in knowing that they may not lose their home in case of a serious event – it is not a fully-underwritten insurance policy.
This means that everyone who signs up with a bank mortgage is issued a policy as long as they answer “no” to the bank’s insurance questionnaire.
The tricky part here is that most of us aren’t aware of the true status of our health. At the time of claim, 25% of those who are covered by bank mortgage protection insurance are declined due to fraud or omission. Yes, if you’re covered by a bank mortgage protection insurance, they will investigate your lifestyle and medical history up to the time when you first applied for coverage.
An individual mortgage protection insurance, on the other hand, is underwritten at the time of application, and depending on the amount of life insurance coverage applied for, medical tests like blood draw, urine samples, and physical check-ups may be required. All individual insurance policies are underwritten by looking into the applicant’s medical history and lifestyle as well as the medical history of his or her immediate family members (father, mother, and siblings).
Unlike bank mortgage protection insurance, an individual mortgage protection insurance usually protects the financial interest of your loved ones, instead of the bank or your mortgage lender.
In some instances, a collateral assignment of the policy’s benefits may be required by the bank, but only up to the extent of the mortgagor’s financial obligations to the mortgage, instead of the whole benefit if you were to get your mortgage protection insurance with the bank.
Mortgage Protection Insurance in Canada
While most Canadian homeowners are aware of the necessity and benefits of having mortgage protection insurance, only a few know that they can opt to get this type of life insurance outside their bank.
Bank mortgage protection insurance is usually designed to protect the financial well-being of the bank, and not really yours and your loved ones. Aside from the fact that your household isn’t fully protected from losing the family home due to post-claim underwriting, you pay a level premium all throughout from when you first applied for coverage yet in the worst case event that your family would ever need to make a claim, the benefits payment is limited to paying off the mortgage balance at the time of a mortgagor’s death. No excess funds are ever released to the family, this is because bank mortgage protection insurance only has decreasing death benefit coverage, which decreases as you pay down your mortgage obligation.
By implementing a 25-year term life insurance with optional credit disability and critical illness coverages, you have the option to have a level coverage. A level death benefit life insurance covers your loved ones with the same amount of life insurance benefit all throughout the mortgage period.
Say if you just acquired a home for $350,000.00 with a 5% downpayment, this leaves you with a $332,500 mortgage principal balance. Implementing an individual mortgage protection insurance policy with a level death benefit of $332,500.00 will have the same amount of death benefit at the end of the 25-year loan period. If something were to happen to any one of the mortgagors, say on the 20th-year, the family would still receive the full $332,500.00, they can then pay off whatever the mortgage balance is and keep the remaining amount.
A bank mortgage protection insurance will just pay off the mortgage obligation, (provided of course if the insurance policy will pay out the death benefit), no excess funds will ever get released to the family.
This is not to say that a decreasing death benefit option isn’t available with an individual policy, which in fact is and it only actually decreases up to 50% of the initial amount of coverage, so if you’re purchasing $332,500.00 worth of coverage at the time of application, most that it will decrease is $166,250.00 and will stay level up to the 25th-year, with an option to convert into permanent insurance to serve a more long term financial obligation such as final expenses that only goes away when the person passes.
Bank Mortgage Protection Insurance vs Term Life Insurance
When it comes to mortgage protection insurance, there are two main types of policies:
Bank Mortgage Protection Insurance
Banks typically offer mortgage protection insurance as a way to protect their interests in the event that the homeowner passes away or becomes incapacitated.
The main drawback of bank mortgage protection insurance is post-claim underwriting. This means that insurance applicants aren’t underwritten at the time of application but when they file a claim. As a result, you’re not sure that your insurance policy is actually going to payout at the time when you or your family needs it the most.
Another factor that you should seriously consider when implementing a bank mortgage protection insurance is the fact that the beneficiary isn’t necessarily your family but the bank, while you’re the one paying for the monthly premiums.
Yet another drawback of bank mortgage protection insurance is that it only pays the bank whatever the remaining mortgage balance is left at the time of death.
Individual Mortgage Protection (Term Life Insurance)
Individual mortgage protection insurance policies offer much more comprehensive coverage and are designed to protect the interests of the homeowner’s loved ones, instead of that of the bank. These policies usually have a level of death benefit, meaning that the amount of coverage remains constant throughout the length of the mortgage obligation. With an individual mortgage protection insurance policy, the homeowner’s heirs will receive the full death benefit regardless of how much is still owed on the mortgage.
Critical illness and credit disability insurances can also be added as riders to an individual term life insurance to fully cover your and your loved ones’ interest in case you’re unable to make your mortgage payments in case of a serious illness or an injury. The benefits are paid out to you (not the bank), then you can just continue paying your bi-weekly or monthly obligation to your lender while you’re recovering your health.
An individual mortgage protection insurance is simply, term life insurance; you get the same benefit as everyone who has individual term life insurance such as the ability to convert part or whole into permanent life insurance, and the ability to renew your contract, should you need to extend coverage and doesn’t necessarily need a permanent life insurance protection.
As individual life insurance, you own your policy and have full control of your coverage. When you switch your mortgage to a different lender after your initial 5-year term, you need not apply for another mortgage protection insurance as you would if your mortgage is covered by the group plan of your previous lender. Should you decide to sell and buy another house, you can keep your policy and use it against your new mortgage, even if you move to a different province.
It’s a long-term plan with a level premium for 25-years, so your premiums don’t increase even if you move to different mortgage lenders every 5-years.
Free Mortgage Protection Insurance Consultation
Now that you know what mortgage protection insurance is and how it works. You know that you can have far better protection than simply getting it from your lender. Keep in mind that your lender will not rescind the mortgage offer if you don’t get your mortgage from them because they will still earn money from mortgage interest and besides, coercing you to purchase mortgage insurance from them is against compliance, which you can actually lodge a complaint about.
As Canadian tax residents, we all have the same rights and one of those rights is the freedom to choose. You are free to get your mortgage protection insurance elsewhere and if the bank mortgage specialist tells you that getting mortgage protection insurance from them helps out with your mortgage approval, the person you’re talking to isn’t being honest and just wants to upsell you.
We offer a free mortgage protection insurance consultation to homeowners who are already covered by bank mortgage insurance or those who are looking to implement a mortgage protection insurance that fully protects themselves and their loved ones.
Feel free to fill out our appointment request form at your most convenient time and we’ll be glad to help you out in getting a mortgage protection insurance that works for you.