by Glenn Cooke
Welcome to our channel on mortgage insurance. My name is Glenn Cooke and I’m with Only Insurance. Today we’ll be discussing whether mortgage life insurance is a good idea.
I’m going to tackle this from two directions. First, we’re going to discuss your choices of mortgage life insurance policies, looking at what’s available and the pros and cons. Secondly, we’re going to talk about whether you should be buying insurance to cover your mortgage at all, or if there’s something else you should be doing.
So, lets start with your choice of policies. Mortgage life insurance is generally covered using two types of insurance policies; mortgage protection at the bank, or term life insurance available through a broker.
The short answer here is, you should not be looking at mortgage life insurance through your bank, but instead you should be looking at term life insurance. Now, we have another video where we do an indepth comparison of these two choices, so for now I’ll give you a summary.
Mortgage life insurance is far more expensive than a comparable 20 year term policy. In some cases it’s over twice the cost. Mortage life insurance provides decreasing coverage. Even though your premiums remain level the coverage amount goes down with your mortgage. Term life insurance coverage is level for the duration of the policy. If you become uninsurable with mortgage life insurance and switch mortgage companies you risk losing your insurance coverage. If you become uninsurable with a term life insurance policy you have a conversion option which lets you exchange for a permanent, lifetime policy, at health rates, without a medical exam. And lastly because of the way mortgage life insurance is underwritten, there’s a higher tendency to end up with a denied claim.
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So if you’re looking to cover your mortgage with life insurance, what policy should you choose? You should absolutely be looking at a term life insurance policy from a broker instead of a mortgage life insurance policy through your bank. Just a quick side note, you can visit mortgageinsurance.ca to get online quotes on various types of term life insurance, look at adding critical illness coverage to your policy, and actually apply online when you’re ready to proceed.
Now lets look at whether mortgage life insurance is a good idea. Well, the problem with insuring your mortgage is that it can lead to the wrong amount of coverage – you can easily be underinsured if you’re insuring your mortgage. Let me explain.
Insurance is intended to replace a catastrophic financial loss. So you’re paying your mortgage every month and you die – where’s the catastrophic financial loss? Your family is still living in the house, the mortgage is still owed. The fact that there’s no catastrophic financial loss associated with our mortgage when we die tells us that we’re looking at the wrong thing.
For most of us, the actual financial loss when we die prematurely is our income – our paycheque. That’s a huge number – take your gross annual income and multiply it by the number of years you have until retirement. That’s going to be a big number – possibly 7 figures. And in most cases, you should be insuring your income, not your mortgage.
If you have enough coverage to replace your income for a long period of time, your beneficiaries can continue to live in their current lifestyle – including educational costs, utilities, your mortgage, food, car payments and so on.
Mortgage life insurance is a proxy for covering your income, but can be deficient in that it’s likely to not provide enough coverage to maintain your beneficiaries current lifestyle. Now that I’ve pointed out all the other costs you pay with your income, you can see that mortgage insurance is often not going to be enough coverage.
Therefore, in a typical family situation, mortgage life insurance is not a good idea. Instead, you should be looking at purchasing a term life insurance policy for 10-15X your annual income. That gives you a high probability that your family can continue to live in their current lifestyle after your premature death.
Now there is one situation where using mortgage life insurance as a proxy or substitute for the real loss is reasonable. That’s the case where we have two income earning adults with no young financial dependents. In this case, we make the assumption that either adult cannot maintain the house on their own income, but if the mortgage payment is removed from the equation then they can still live in the house and provide for the rest of their lifestyle from their own income. In that case, a term life insurance policy (again not bank mortgage insurance) covering the amount of the mortgage plus about 10% for other costs, is a reasonable estimate.
So is mortgage life insurance a good idea? Not if you’re looking at mortgage insurance through your bank. You should be looking at a term life insurance policy instead. For coverage amounts, the amount of your mortgage is likely to be insufficient to maintain your family’s lifestyle, but can be a reasonable proxy if there’s two income earning adults and no other financial dependents.
If you’d like to look at term life insurance to cover your mortgage instead of mortgage life insurance, I’d encourage you to visit mortgageinsurance.ca. There you can compare term life insurance prices for different policies, look at adding critical illness insurance, and actually apply right online through the website. You can go there now by clicking on the mortgageinsurance.ca logo at the bottom of this video.
Thanks for watching, and we’ll see you next time.