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. Therefore each year you are getting less and less value for your premium.

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

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! Furthermore mortgage insurance through your bank is owned by your bank.  The bank is beneficiary and the coverage is not portable. Meaning that if you sell your home or switch banks your coverage ends without value.  If your health as subsequently changed obtaining new coverage may be expensive or unavailable.

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

  • Mortgage Insurance Pitfalls

    07/31/2014

    If you're an avid reader of the LSM Insurance blog, you know we're not fans of Mortgage Insurance and neither, it turns out, is the Toronto Star's personal finance columnist, Ellen Roseman.

  • Are Homeowners Properly Insuring Their Increasing Debt Loads?

    07/10/2014

    LMLM

  • The Top 5 Life Insurance Loopholes with Ellen Roseman

    05/07/2014

    Life insurance is a difficult concept to wrap one's head around. But even when you think you have more than a basic understanding, insurance contracts are embedded with many loopholes and restrictions that often trip up consumers.

  • Top 5 Life Insurance Mistakes

    04/25/2014

    Life insurance is always a tough sell: an invisible product that the policyholder will never actually benefit from directly, and yet they still have to pay for it every month.

  • What Canada’s Financial Experts Say About Mortgage Insurance

    02/25/2014

    We've investigated and advised against mortgage insurance for years here at LSM Insurance, and it mostly comes down to one dastardly component of how it works — post-claim underwriting.

  • An Insurance Horror Story: The Suicide Clause

    01/21/2014

    Christine McCarthy was victimized by an abusive husband for years, and now, thanks to his choice to commit suicide, she's being victimized all over again by her insurance company.

  • Mortgage Life Insurance: What to Look Out For

    08/21/2013

    Many insurance brokers have explained the perils of mortgage life insurance to the clients.

  • Life Insurance For People Over 50

    08/10/2013

    According to a study conducted by bankruptcy trustees Hoyes, Michalos & Associates, those Canadians age 50 to 59 are the most at risk for bankruptcy. Their debts — including credit cards, personal loans and other forms not backed by assets — exceeded $84,000.

  • Unclaimed Life Insurance Benefits

    05/02/2013

    According to the Canadian Life and Health Insurance Association, 22 per cent of the people who request a search for lost life insurance policies find one, and in about 25 per cent of those cases, the policies had actually been surrendered for their cash value or simply lapsed. However, the rest revealed unclaimed benefit amounts ranging from $3,500 to $210,000.

  • What Is Mortgage Life Insurance?

    08/15/2012

    Mortgage life insurance is insurance that can be purchase from a lending institution.

  • Seven Caveats with Bank-Owned Mortgage Insurance Coverage

    06/16/2012

    Bank-owned mortgage life insurance policies offer several hidden pitfalls. The following seven are just the ones we could think of off the top of our heads:

  • A Mortgage Insurance Solution Through IA Excellence

    06/15/2012

    IA Excellence offers a mortgage insurance solution through its Universal Loan Insurance Program. The contract is independent from creditors and the policyholder owns the coverage.

  • Desjardins Insurance Multi-Coverage Discount Option on Term Life Policies

    04/03/2012

    Desjardins Financial Services offers a unique, multi-coverage discount option on their term insurance lineup.

  • Guaranteed Issue: Mortgage Life and Disability Coverage

    03/27/2012

    Bingham Group Services Corp. (BGS) offers a no medical guaranteed issue life and disability creditor insurance policy.

  • Bingham Group Services Corp: BGS Mortgage Insurance Policy

    03/27/2012

    Bingham Group Services Corp. (BGS) is Canada's leading third-party administrator in the business of creating marketing and administering group creditor insurance products. BGS products are underwritten by Forester's Life Insurance Company, which is a Canadian incorporated life insurance company providing financial security to Canadians.

  • Insurance Policy Claims: The Necessary Steps

    08/18/2011

    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 to prepare?Don't stress! We'll show you...

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

    01/21/2011

    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 mortgage.

  • Bank of Montreal’s Mortgage Life Insurance Policy

    12/12/2010

    Unity Life of Canada joined the Foresters family in April 2008 and as of Jan 23 2012 changed their name to Foresters Life Insurance Company.

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

    12/12/2010

    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 be purchased on its own.

  • Mortgage Insurance and Post-Claim Underwriting

    06/08/2009

    a young family needs life insurance
    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 coercive selling is illegal. A company is not allowed to provide a product or service on the condition that their customer purchase an additional product from the same, or a related company.

    Banks also engage in Post-Claim Underwriting, meaning they don't check your medical history, they just ask you a bunch of medical questions and decide  whether you qualify, based on your answer, right there on the phone. It's at the time when a claim is filed that things start to unravel because it's not until after the insured dies that the banks finally begin phoning around to doctors and checking into their medical history. If they find any descrepencies, the beneficiary may be out of luck and the bank may decide the insured should've never qualified for coverage in the first place.

     

    The practice is such a problem that CBC highlighted the pitfalls of Post-Claim Underwriting in a segment on CBC Marketplace called In Denial.

    Banks engage in Post-Claim Underwriting, meaning they don't check your medical history. They just ask you a bunch of medical questions and decide  whether you qualify, based on your answer, right there on the phone.

    Purchasing insurance from a qualified broker saves you the roll of the dice that comes with the slimy practice of Post-Claim Underwriting, since indvidual life, disability and critical illness insurance plans do their underwriting at the time of application. There are also additional benefits to individual insurance that a bank plan simply can't provide:

    • Level coverage

    • Portability

    • Customization with the length of your plan through either a term or permanent option.

    • You choose the beneficiary, the bank doesn't.

    • Many plans have a return-of-premium feature if a claim is not made.

    If that weren't enough, bank plans are normally 30-40% more expensive than individual plans. You can get a free quote and compare for yourself using our Term Life Instant Quote Page.

Canada's Lowest
Life Insurance Rates

Amount:
Sex: Male Female
Smoker: Yes No
Name:
E-Mail:
Telephone:
Year of birth:

Get our NEWLY updated
Insiders Guide To Buying
Life Insurance FREE

with each quote request.

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.

38 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

  12. 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

  13. 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

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

    Thanks for the note!

  15. 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.

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

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

  17. 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.

  18. 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.

  19. 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

  20. 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

  21. 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.

  22. Kallee 06/12/2013 at 5:12 pm

    Im looking for $200,000 Mortgage Coverage. The problem is I had a Heart attack 3 years ago and I was just declined. I’m 61, can u help.

  23. LSM Insurance 06/12/2013 at 5:18 pm

    Hi Kallee, You could look into a preliminary inquiry with a carrier who has not declined you or look into Simplified Issue Plans with Industrial Alliance, Canada Protection Plan or Assumption Life. The first two have Simplified Issue Term plans for $100,000 even if you were declined in the last 2 years. But there would be a two year waiting period for non accidental deaths.

  24. Thomas 08/16/2013 at 7:27 pm

    How much is it for $440,00 Mortgage insurance me and my wife. My DOB is …. and my wife is ….. She had cancer 4 years back

  25. LSM Insurance 08/19/2013 at 1:30 pm

    Hi Thomas, The premiums will depend on your smoking status and the type of plan. Your wife may be able to qualify for a traditional policy likely with a rating i.e. an extra premium depending on the type of cancer and treatment. We will be in touch by email

  26. Rob 11/08/2013 at 9:23 am

    Can I get an immediate pay mortgage ins. plan no wait even if I was just declined. Personally I think my decline makes no sense. But am I automatically ruled out elsewhere. I don’t want to spin my wheels

  27. LSM Insurance 11/08/2013 at 9:45 am

    Hi Rob,

    You can submit another application and depending on the circumstances you may qualify for a traditional life insurance plan – we could also submit a preliminary inquiry which is not a formal application. Simplified Issue Life Insurance – no medical tests and a short series of health questions may also be an option

  28. Brian So 11/26/2013 at 3:00 pm

    Great post!
    A few things I’d like to add: The insurer does not offer guaranteed rates for mortgage insurance, so your premiums may increase down the road. Also, since the policy is not owned by you, it can be cancelled with 30 days notice, leaving you without life insurance coverage.

  29. LSM Insurance 11/26/2013 at 3:15 pm

    Good point on the policy being owned by the bank.

  30. LSM Insurance 01/03/2014 at 4:30 pm

    Promod Sharma highlights some good points on the Pitfalls of Mortgage Life Insurance in his article link to blog.riscario.com

  31. Louis 01/21/2014 at 4:36 pm

    How can switch my mortgage insurance with TD and what are the penatlies how much do you think I’ll save

  32. LSM Insurance 01/21/2014 at 4:41 pm

    Louis there should not be in penalty to cancel your mortgage insurance. You would want to make sure your new coverage was approved first.

    As for the savings with out your date of birth, smoking status etc it’s hard to say. I will send you a separate email now.

    Jim Yih a went over some interesting points on the benefits of individual life insurance versus mortgage insurance

    **When you buy mortgage insurance through the banks, the policy is attached to a specific mortgage. If you move your mortgage to another company, you may have to re-qualify for new mortgage insurance coverage through the new financial institution.

    With a personal life insurance policy, you own the policy regardless of where the mortgage is taken out. If you wish to change the coverage, you have the flexibility to make changes.

    With mortgage insurance there is basically one policy for everyone. With personal life insurance, there is opportunity and flexibility to customize these policies to your personal needs**

  33. rick 02/11/2014 at 1:40 am

    hi…..excuse my ignorance re these financial aspects but could you pls provide some info to the following:

    scenario: 63 year old single man wishes to purchase condo for 400k…….only significant debit is current mortgage on his home 128k……assets to 170k in mutuals with public service pension of 60k per annum ,,,,,,,,lifetime smoker but currently not smoking
    Q do you think i’ll qualify for a mortgage
    Q do you think i’ll qualify for mortgage insurance,,,,,,,should I get mortgage insurance or life insurance
    Q if I pass, do the benefactors |

    (my daughters), own the condo

  34. LSM Insurance 02/11/2014 at 10:13 am

    Thanks for the note Rick. Regarding if you qualify for a mortgage. I would think so but this outside my area of expertise. A mortgage broker or lending institution should be able to assist further in this area.

    If you are in good health you should qualify for mortgage insurance. But life insurance to cover the mortgage generally provides a much better value. If you name a beneficiary they would receive the money if you pass away. We are happy to help further you can contact us at 1-866-899-4849. Regards, Chantal

  35. James 03/30/2014 at 6:15 pm

    What are my options if the bank denied me for mortgage insurance. I still need the coverage and I would prefer a plan without a wiating period

  36. LSM Insurance 03/30/2014 at 6:33 pm

    You could request that bank informs you or your doctor in writing why you were declined. There is a chance you could still qualify for a traditional life insurance policy. Mortgage insurance plans do not offer sub standard rates. Life Insurance policies do and as such you could qualify for a rated policy – a policy which is issued on an immediate pay basis but has an extra premium for the extra health or lifestyle risk. You could also submit a preliminary inquiry which is not a formal application but would give you an idea which companies might approve you.

  37. Maria Teresa Fernandez de Castro 07/24/2014 at 12:24 am

    I did not know about this and feel into the trap bing coerced into a mortgage that had the condition of getting mortgage insurance with their bank. I have now asked to cancel with them and hire another company and they are saying I can’t

    Do you know what are my options?

  38. LSM Insurance 07/24/2014 at 9:30 am

    This should not be a condition of the mortgage. But it is important not to confuse this with mortgage default insurance.

Skip to
second column

Leave a Reply

 

3173 Bathurst Street, Toronto, ON M6A 2B1
Head Office: 2900 John Street Suite #302 Markham, L3R 5G3
Office 1-866-899-4849, 905.248.4849 Fax 905.300.4848


© LSM Insurance Services Ltd. 1998-2014 | All Materials