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?
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.
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
Contrary to what certain insurance brokers will try to get you to believe, buying an insurance policy for every occasion is not always a good idea. As everyone has a different need, it’s important to do some research and understand what the right type of insurance is for you.
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.
These days, it seems like debt is the norm. Instead of it being the "elephant in the room," it's all everyone talks about ─ the bragging rights one obtains from taking out a loan to buy a luxury car, or funding a vacation trip entirely on credit.
According to a survey by Manulife Bank of Canada, homeowners are more comfortable with both holding and talking about their debt than their parents were.
"Recently I've noticed people are happy to talk about their debt as if it's an achievement, almost like it's a status symbol," Personal Finance Expert Barry Choi remarks in his article. "Having the attitude that debt is normal, or 'everyone has debt so it's okay' is the last thing we should be thinking."
This kind of thinking could be attributed to "our current low interest rate environment, which makes debt management seem less intimidating than it was in the '80s and '90s, when rates were much higher," says Jason Daly, VP Product, Marketing & Business Development, at Manulife Bank.
Atlanta-based business consultant Paul Paetz, though, sees dark waters ahead. Unlike Canadian economists, he expects Canadian mortgage rates to rise fast and potentially have a huge negative impact on the real estate market.
Canadian homeowners don't seem to share the same concern. The survey states that 39% of homeowners feel more comfortable holding debt compared to previous generations, as opposed to the 13% who feel less comfortable.
This newfound confidence isn't to say that Canadians are becoming better at handling their debt. In fact, 38% of Canadians believe that it will be harder for them to become debt-free than their parents, compared to 23% who think it'll be easier.
The reason behind this discrepancy is our generation's new (and false) definition of what debt truly entails.
Mortgage Debt is Debt, Too!
When we talk about "debt load" or "household debt," we mean the total amount of debt a consumer owes to financial institutions. This includes any consumer debt — such as bank overdraft, credit card debt, and financed loans like car purchases or personal lines of credit — and (our favourite) mortgage loans.
Of homeowners in their 20s, 68% don't take into account mortgage debt when they think about their debt, compared to 60% in their 30s, 48% in their 40s, and only 29% in their 50s.
The reason is that young homeowners may be more swamped with high-interest debt, like credit card debt. Credit card debt is tricky in the sense that leaving even $1 on your credit card will mean you end up having to pay interest on your entire balance.
While paying off debts with the highest interest rate first is a great way to reduce personal debt, let's not forget that your mortgage debt still exists.
Insuring the Debt Load
With the ever-increasing debt load, my best advice to any Canadian family would be to try and bring down their household debt while employing the services of a financial planner to make them aware of the best options available to protect their family financially.
A life insurance policy is a great place to begin. When you first bought your home, your lender might have suggested mortgage insurance to protect your new asset. But what you didn't know is that there are cheaper individual insurance policies out there that offer so much more flexibility.
Unlike mortgage insurance obtained through a lender, which has declining coverage and lower payouts, a term life insurance policy offered through a life insurance company is affordable and puts you in control of your mortgage protection. The proceeds from a term insurance policy are paid to your beneficiaries, who can then use the money however they deem appropriate ─ such as paying off high-interest credit card debt first. As long as you continue to pay your premiums, your coverage will remain in force, regardless of the status of your mortgage changes.
Disability insurance can also be a good option. If an accident leaves you unable to work, your mortgage won't be the only thing on your mind. Disability insurance replaces your income, enabling you to pay off medical expenses and pay the bills while focusing on healing and getting back to normal.
For more details on life insurance to protect your debt load, please contact us at 1-866-899-4849 or visit our term life insurance quote page.
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.
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.
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.
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.
Many insurance brokers have explained the perils of mortgage life insurance to the clients.
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.
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.
Mortgage life insurance is insurance that can be purchase from a lending institution.
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:
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 Financial Services offers a unique, multi-coverage discount option on their term insurance lineup.
Bingham Group Services Corp. (BGS) offers a no medical guaranteed issue life and disability creditor insurance policy.
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.
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...
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.
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.
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.
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.
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:
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.
Life Insurance Rates
What Clients Say
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.
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.
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.
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.