What is Mortgage Insurance?

mortgage insurance cartoon
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

Posted by .

Chantal Marr is a member of the Independent Financial Brokers of Canada.
Much of her success stems from her ability to listen to her clients' needs.
Read Chantal's background.

What Clients Say

Real & Dorothy Duteau
Real & Dorothy Duteau

LSM Insurance team was highly recommended for our insurance needs and our first meeting confirmed what we were looking for: integrity, honesty, competency and affordable products.

Also throughout the process, the LSM Insurance team kept us informed on the status of the application and was involved in clearing all obstacles. This is what we really appreciated, as his follow-up was 110%.

With this kind of service and dedication, there is no doubt that we will be with LSM Insurance for the rest of our lives.

Mario Mavrides
Mario Mavrides

I have been a client of LSM Insurance for three years and have been extremely happy with his service.

Their approach is straightforward and is time friendly. It's a great feeling to know I have a first rate professional looking after my insurance and financial needs.

Arthur
Arthur Balaniuk

LSM Insurance was referred to me by a close friend.

I had spoken with several insurance people prior to meeting with LSM team and I was very impressed with their straightforward approach.

I am very pleased with the plan he set up. It's easy to see why they have become so successful and I would not hesitate to refer others looking for insurance and investment solutions to LSM Insurance.

Maher Rizkalla
Maher and Salwa Rizkalla

We have been clients of LSM Insurance for over nine years, and we have always found LSM team very responsive to all our insurance and financial needs.

21 Comments

  1. jagdeep sohal 02/26/2010 at 10:39 pm

    hii sir i have question that is
    how is mortgage insurance secure ur home what do they do for secure ur home
    thanku

  2. LSM Insurance 02/27/2010 at 12:34 pm

    Thanks for the note Jagdeep. Mortgage insurance pays your beneficiary a tax free lump sum if you die and or become sick this money can be used to pay off your mortgage and other houshold expenses.

  3. Isabel 02/27/2010 at 10:03 pm

    Hello. i am a person with a disability and recently purchased a house. I have critical insurance but I was told I will need mortgage insurance. Do I really need it? Or is there another insurance I can purchase that will sufice. Any info greatly appreciated. Isabel.

  4. LSM Insurance 02/28/2010 at 4:21 pm

    Mortgage insurance is essentially life insurance and or disability/critical illness insurance to pay off the mortgage. Life insurance etc. can purchased from a separate from a life insurance company in lieu of mortgage insurance through a lending institution.

  5. ANGEL 03/28/2010 at 3:03 pm

    Hello

    Can you help me regarding the best way to protect my home I bought Sept/1/09. Should I buy mortgage insurance from a different place then my bank where I originally mortgaged my house or should I buy a $250.000 term life insurance from some where different to cover the balance pay out apon my death. I only have $70.000 plus interest of 4.25 percent on pay out of my mortgage apon my death which is due on the first of the month, but my interest can change every 5 years. I have a 5 year renewable.

    Waiting for your reply
    Thank you

  6. LSM Insurance 03/28/2010 at 6:55 pm

    Hi Angel,

    Thanks for the note. An individual life insurance policy almost always gives you a better value than the bank’s mortgage insurance plan. Having said that make sure your first approved for new coverage before cancelling your existing mortgage insurance.

    I would also suggest taking a more holistic approach to your life insurance needs. Your mortgage is likely just one component of your life insurance needs.

    The attached calculator link to lsminsurance.ca
    can let you how much insurance you need – it takes into account immediate needs like mortgage protection and your income replacement needs and subtracts existing assets including any life insurance you already have.

    All the best!

  7. piyush 04/24/2010 at 12:29 pm

    hi, i would like to know that do i have to buy life insurance of mortgage insurance. i just bought house of 470000 so, pls. advise me.
    thanks ,
    piyush

  8. LSM Insurance 04/24/2010 at 7:23 pm

    Thanks for the note. Some lenders may require life insurance on high ratio mortgages. Whether it is a requirement or not it is a good idea to factor your mortgage into your overall life insurance needs.

  9. sonya 05/26/2010 at 12:42 am

    Hello,
    We are currently paying a mortgage insurance but were told that term life insurance would be a better choice. I am 34yrs old, and my husband is 38. Both are non smokers and in generally good health. Would you please give us a quote on 250,000 (per person)term life insurance. Do we have a choice of paying higher monthly premium to cut short the number of years.
    Thank you.

  10. LSM Insurance 05/26/2010 at 9:20 am

    Sonya, thanks for the note. We are happy to help – the premiums in part will based on the length of the Term you select. We will send you a separate email now.

  11. Malek 06/14/2010 at 8:19 pm

    Hello. I recently purchased a house and have signed my mortgage with BMO. Ofcourse the mortgage (life) insurance as mentioned is through an outside company, in this case Sun Life. They gave us a “deal” that if both my wife and I (age 29 both non smokers), that the premium ~41c per $1000 of average monthly loan balance, would be less than if we were to take it separately (27c). My payments havent started yet as I have not taken possession. Given that my wife already has whole life insurance (of equal value to the mortgage), is it worth it to keep the mortgage insurance, or get life insurance for myself instead. Keep in mind that premiums increase with age, however they are also based on average monthly loan balance (which I am guessing means that premiums should decrease as I continue to pay my insurance). I am on a variable rate and will be applying extra amounts to my mortgage yearly to reduce future payments.

    Thanks

  1. LSM Insurance 06/15/2010 at 8:36 am

    Thanks for the note. Premiums aside individual life insurance also offers the following benefits versus mortgage insurance through a lending institution:

    1. Level Coverage
    2. Coverage is Portable
    3. You choose your beneficiary
    4. The coverage can be integrated with your other life insurance needs

  2. Mitch Reynolds 06/17/2010 at 3:48 pm

    This is an excellent article on Mortgage Insurance. Why would anyone pay an inflated premium for a declining amount of insurance!! Get your own insurance policy for a level premium for 20 or 30 years, and you can take it from bank to bank as you renegotiate your mortgage, and you can even decrease your coverage as your mortgage declines, thus reducing your premiums.

    Bottom line – get qualified advice from an insurance professional, not the banker who is a loans officer.
    Mitch Reynolds

  3. LSM Insurance 06/17/2010 at 4:10 pm

    Thanks for the note!

  4. LuCynda 09/13/2010 at 12:43 pm

    Also – many benefits are not paid out as they do no medical exams or true medical questionaires prior to approving the individual for the mortgage insurance. It is after a claim is made the insurance company takes into consideration the health records of the individual. MANY claims are denied because the company will say the person had a pre-existing condition they did not report upon application. They will deny a person for having had medical tests they did not report on the application. Like mammograms, pap tests, blood pressure checks etc.

    The CBC report is great!

    And – mortgage insurance is NOT required. As a matter a fact, it is illegal for a mortgage company to tell a person they must have mortgage insurance in order to be approved for the mortgage – it is called tied selling.

  5. LSM Insurance 09/13/2010 at 1:00 pm

    Thanks for the note – I’m glad you liked the report.

  6. Francis 05/14/2013 at 3:30 pm

    I have a bit of a long story. I was declined for life insurance last year because of my weight. I was about 150 pounds overweight at the time.

    I have since lost 75 pounds and my blood pressure is stable. I have heard if I get declined it stays on your record like a speeding ticket. What should I do Idon’t want to declined but I have a youbg family.

  7. LSM Insurance 05/14/2013 at 3:55 pm

    Thanks for the note Francis. Congratulations on your weight loss. Most insurance will count any weight loss in the last year as half i.e if you lost 60 pounds in the last 12 months they will add back 30 pounds when underwriting your build. I know this does not seem entirely fair but that is how most carriers build a buffer in their underwriting. We could submit a preliminary inquiry to see if traditional coverage is available and if there would be a rating i.e. a surplus premium charge. Some Simplified Issue – no medical tests and a limited number of health questions do not have a build question.

    We will send you a separate email now.

  8. Syed Raza 05/14/2013 at 5:58 pm

    Hi Francis,

    Just a side note to the above comment, many carriers will only ask if you have been declined the past two years and some deferred death benefit plans will not ask if you have been declined at all.

    Thanks

  9. Roland 05/22/2013 at 2:44 pm

    Hi There,

    How much is $300,000 Term ins. for a 40 year old. Non Insulin diabetic. No insurance now

  10. LSM Insurance 05/22/2013 at 3:52 pm

    Thanks for the note Roland. The premiums will depend on the type of Term plan – Term 10, Term 20 etc and the stability level of your diabetes. We will send you a separate email now.

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