When you apply for a mortgage and obtain a commitment, you will be asked to sign a lot of documents. Among them is usually an offer for mortgage insurance. If the lender doesn’t ask about it, the mortgage agent will. It seems perfectly sensible in theory, but does it make sense for you?
Here’s the good news about mortgage insurance: If you die, the mortgage gets paid which means that your loved ones won’t have to deal with the financial stress of having a potentially large and on-going liability to manage on top of trying to cope with your loss. It certainly is a great idea to ensure that this gets covered. But the question really is this: Is mortgage insurance the best option? No, it isn’t.
First, when you insure your mortgage through a lender or a broker, the coverage is solely for your mortgage. What about your other debts and obligations? Your loved ones will have to deal with those too, and they are not included in mortgage insurance. If all you have is the latter, the lender will receive the equivalent of the balance remaining on the mortgage and your loved ones will receive nothing. Sure, they will no longer have a mortgage to pay but they still have to deal with all of the other financial issues, not the least of which is the cost of a funeral. It really isn’t cheap to die. Even so-called *low cost* options will set you back several thousand dollars. Just this week I received a flyer in the mail from Canada Purple Shield in which they claim that “…statistics show that the average cost for a funeral is over $10,000.” Who will pay for this if there is no insurance coverage?
Second, the value of the policy diminishes over time as you pay down your mortgage, however your premiums remain the same. If for example you’re paying $70 per month to insure a $300,000 mortgage with a 3% interest rate, monthly payments and a 25 year amortization, five years later you’re still going to pay $70 per month even though the value of the payout will have dropped to $256,400. That’s a drop in value of more than $40,000 for the same premium. If instead you had opted for term life insurance, the value of the payout would have remained the same.
Third, the coverage for some policies ends when you sell the house. Since the coverage is tied to a particular loan, the moment you pay out that loan (i.e. when you move) the coverage stops. If you had term insurance, it would apply regardless where you live or how many times you moved. There are mortgage insurance policies that are portable, thereby allowing you to change lenders on a loan, but again the problem of diminishing value still applies.
Fourth, when you get your own life insurance, you designate the beneficiary and you may choose whomever you like. For mortgage insurance, the lender is the beneficiary. It may be that your beneficiaries don’t want to pay off the mortgage in full, choosing instead to use the money for other more pressing matters. If you have mortgage insurance they don’t have that freedom.
Finally, it’s almost always cheaper to get term life insurance. Let’s take a look at a real-life example. This past week we secured a house for clients at a purchase price of $355,000. Our investors obtained a mortgage valued at $284,000. Along with the mortgage commitment, they were offered mortgage insurance at a cost of $130 per month. These investors are in their 30s and 40s. Now let’s compare that with my own situation. My husband and I have term life insurance valued at more than $1.3 million dollars for which we pay $125 per month. Apples and oranges you might say. Yes of course because we are different people with different situations, but wouldn’t you want to explore what’s possible given the large difference in value for roughly the same cost? My point is that it’s worth having a conversation with an insurance broker to see what he or she can offer you for the same amount. While you’re having that discussion, consider the other items beyond your mortgage that you might want to insure as well: the cost of the funeral, any debts you have, money for your children’s education, funds to help your spouse through the next few years and so on. For the same price as mortgage insurance you might well be able to get coverage for a host of other areas of concern.
Mortgage agents make a commission on every mortgage insurance package they sell, therefore they have a vested interest in selling those policies. That said, I work with a number of excellent mortgage agents and I know that they have their clients’ best interests at heart. First and foremost they are concerned that the mortgage be insured, and that’s perfectly sensible. If you don’t want to check out other options for whatever reason then by all means sign on the dotted line for mortgage insurance. However the point of this blog post is to show that there are other, possibly better alternatives and that it’s well worth your while to call an insurance broker to see what your options are. The result will likely be that you get more and better coverage for a cheaper price.
The bottom line: Ensure that you’re insured.