What is Mortgage Insurance?

Our Perils of Mortgage Life Insurance Comic: No Laughing Matter
click the link to read the whole comic

Sounds great just lying there on paper, doesn't it?

Really solid.

The underlying concept of mortgage insurance is that if you die or are incapacitated mortgage insurance will pay off the rest of your mortgage. But be careful: Mortgage Insurance is the most dangerous financial product out there.

Mortgage insurance is the one financial product which declines in value as you continue to pay.

Why Math is Important

Renting vs. Owning

Let's start with your house. When you take a mortgage out on your house, it's a very bad deal to start with. You are just paying interest on the value of the house and in most cases the interest far exceeds the cost of renting the same property.

Here's an example based on a $500,000 20 year mortgage at 6% on a $600,000 house. We'll assume rent inflation of 4%/year:

Year 2010: Mortgage payment $3560/month. Rent: $2500.

You are leaving over $1000 in your pocket per month in ready money. That's a lot of restaurants and vacations twelve months a year.

But let's take it ten years later:

Year 2020: Mortgage payment $3560/month. Rental $3301.
And you have no equity in the house.

Year 2030: Mortgage payment $0. Rent: $4501.

So in most cases, buying a house is a great deal long term, even with the high mortgage payments. How does mortgage insurance compare with home ownership as an investment?

Mortgage Insurance vs. Life Insurance

On that $500,000—as a 40 year old—you would be paying about $100/month for mortgage insurance (not including disability). For 20-year level term life insurance, you would pay about $60-$65 for that much coverage (non-smoker).

Let's go through the years again:

Year 2010: Mortgage value $500,000. Mortgage insurance: $90/month.
Year 2010: Life Insurance value $500,000. Life insurance: $60/month.

Year 2020: Mortgage value $321,000. Mortgage insurance: $90/month.
Year 2020: Life Insurance value $500,000. Life insurance: $60/month.

Year 2029: Mortgage value $41,391. Mortgage insurance: $90/month.
Year 2029: Life Insurance value $500,000. Life insurance: $60/month.

So with term life insurance you pay two-thirds as much for up to 10x as much coverage (depending on how far down the road you are).

How does that friendly banker look now? May as well paint fangs on him or her. But don't be mad. In most cases, even mid-level loan officers have only a vague idea of how badly they are working to rip you off. What most of them know very well is that they get a nice bonus based on how many of these mortgage insurance contracts they close.

The Mechanics of Mortgage Insurance

So if mortgage insurance were actually sold in a fair way, it would just be a bad deal. But mortgage insurance is sold without qualifying the purchaser. After you claim, the insurance company steps in to compensate you, so that you can compensate the bank. That is, if you are lucky. Often, the bank does not really take good care to sign you up properly and the insurer may back out of the deal claiming that you (the client) have lied on the initial application form.

But wait, you say, the mortgage insurance was sold to me by my bank. Sold – yes, but backed – no. Mortgage insurance is an external financial product. Your bank will wash its hands of the affair immediately. They don't want to know anything about it.

Don't believe us? Think we're just scaremongering to sell you life insurance? Think again. The CBC covered the mortgage insurance scam indepth in their fabulous Marketplace Consumer Reports program. It might be funny, but it's not. Lives are ruined.

Here's a highlight of what awaits you.

Trailer for CBC Marketplace In Denial: Investigating Mortgage Life Insurance

For more on what CBC Marketplace found out about Mortgage Insurance Denial. Careful before you click that link. What you will read on the other side is heartbreaking.

What's hard to believe is that over 50,000 Canadians are living with mortgage insurance underwritten after death. That's 50,000 families living at risk of ending up homeless!

Tied Selling

Mortgage insurance is not required and must not be a prerequisite for qualifying for a mortgage.

That's right, if a bank tried to force you to buy mortgage insurance (or discriminated against you if you did not buy it), your bank would be engaging in the illegal conduct of tied selling. Tied selling is explicitly forbidden by Section 459.1 of the Bank Act Canada. (Example of a bank's tied selling prevention policy.)

Mortgage Insurance News

• Insurance Policy Claims: The Necessary Steps

  08/18/2011

  After your loved one passes, we'll make it easy to collect on their life insurance policy. Photo by Megan Ann. So something has happened to you or your family, but thank goodness, you have insurance, and now it's time to file a claim. But how is that done exactly? What do you need to do [...]

• Insurance coverage critical for homeowners’ peace of mind

  03/30/2011

  A mortgage on a home is one of the largest debts incurred by most Canadians, and needs to be taken very seriously. Mortgage holders may want to take measures to protect their family home in the event that payments cannot be met due to death, illness, or disability. Mortgage insurance, available up to age 64 [...]

• Mortgage Insurance: Why You Should Stay Away From the Bank’s Plan w/ Syed Raza

  01/21/2011

  Syed Raza talked to us about Mortgage insurance. When most Canadians sign up for a mortgage, one of the last things they're thinking about is their mortgage insurance. However, what might seem like a small decision can result in paying thousands, if not tens of thousands, of extra premium dollars over the life of your [...]

• Bank of Montreal’s Mortgage Life Insurance Policy

  12/12/2010

  Mortgage Life Insurance is available from Bank of Montreal. Bank of Montreal Mortgage Life Insurance is available directly through the insured's lender. The policies cover the outstanding mortgage balance at the time of death, up to a maximum of $600,000. A maximum of two people can be covered under the policy and the policies are [...]

• Comparing BMO Mortgage, Life, and Disability Insurance Vs. Individual BMO Insurance Policies

  12/12/2010

  Disability and life insurance can be paid through your mortgage policy. Photo by Christopher Chappelear Bank of Montreal offers a mortgage, life, and disability insurance policy, which is available through the insured's mortgage lender. The insured has the option of choosing mortgage life insurance or mortgage, life, and disability insurance coverage. Mortgage disability insurance cannot [...]

• Mortgage Insurance and Post-Claim Underwriting

  06/08/2009

  Mortgage insurance can be a trap Creditor insurance is one of the most profitable products in a bank's line-up. Often sold using high-pressure tactics, many borrowers are backed into a corner and feel like they have to make the purchase or else lose their existing loan.   What many don't know is this form of [...]