There have been many articles written about mortgage insurance vs life insurance, but many of them reflect only on particular aspects of this topic. In many cases, it is a lending institution (e.g. your bank or credit union) that offers mortgage insurance. We spoke to Amir Eny, an independent life insurance broker, to highlight key aspects of mortgage insurance provided by a lending institution and how it differs from life insurance.
There are key differences between individual life insurance and the mortgage insurance you get through a lending institution. It is important to keep in mind the following terms: ownership, premium, handling of smoking, coverage, beneficiaries, and portability.
So, let’s break it down:
Key Themes |
Life Insurance |
Mortgage Insurance from Lending Institution |
Ownership |
You are the owner and control your life insurance policy. |
The bank will own and control your policy. |
Premium |
Guaranteed premiums, as well as potentials for discounts based on health/lifestyle. |
Premiums may change over time. There are also no discounts available based on health. |
Smoking |
Non-smokers are rewarded with better rates; smokers pay higher rates. |
No differentiation between smokers and non-smokers. One blended rate is used. |
Coverage |
Your coverage will remain the same. |
Your coverage will decrease as you pay down your mortgage. It is tied to the balance on your mortgage. |
Beneficiary |
You can determine the beneficiary. |
An insurance payout that comes from mortgage insurance will be made directly to the bank. |
Portability |
The policy remains with you, regardless of mortgage providers. |
Your policy is linked to the bank from which you were given the mortgage. Should you switch mortgage lenders, you may need to apply for insurance again. |
So, what are the cost differences between life insurance and mortgage insurance from a lending institution, and is mortgage insurance always more expensive?
The answer is two-fold – it depends on the product and the coverage needed. In terms of life insurance, mortgage insurance will typically be more expensive, as the chart below shows. Disability insurance is somewhat comparable. It is harder to compare the critical illness component since the amount of illnesses covered by mortgage insurance is often lower than what is covered by classical clinical illness insurance (see the overview below). This is the reason why this component can be cheaper in the mortgage insurance package.
Insurance pricing for a female, age 40, NON-SMOKER:
|
Life Insurance Term 20, coverage $500,000 |
Disability Insurance |
Critical Illness Insurance |
Insurance product from an insurance company |
$34 / month |
$60 / month |
$301 / month (Limit $500,000 and 25 illnesses covered) |
Mortgage insurance from a financial institution |
$100 / month |
$60 / month |
$72 / month (Limit $300,000 and |
Insurance pricing for a female, age 40, SMOKER
|
Life Insurance Term 20, coverage $500,000 |
Disability Insurance |
Critical Illness Insurance |
Insurance product from an insurance company |
$89 / month |
$87 / month |
$546 / month (Limit $500,000 and 25 illnesses covered) |
Mortgage insurance from a financial institution |
$100 / month |
$60 / month |
$72 / month (Limit $300,000 and |
However, it is important to remember that if you have a mortgage insurance policy, you can find yourself later in life with just 5 or 10 per cent of your original mortgage amount owing, but still be paying the same premiums as you did when you owed the full amount.
It is important to note that mortgage insurance from a lending institution is often not underwritten until a claim is made. This could mean that you find yourself in a situation in which the insurance company determines you are ineligible for a claim, even though you have already paid premiums. On the other hand, individual life insurance is underwritten as part of the application process. While this is a significant pitfall, it has become less of a variable in recent years, higher house prices have translated into higher mortgages. For larger mortgages those in excess of $500,000 lending institutions generally complete a paramedical, which may include getting the insured’s height and weight, blood pressure check-up, urine and / or blood tests.
Here is an overview of these crucial differences
|
Life Insurance |
Mortgage Insurance from a lending Institution |
When does underwriting happen? |
Underwritten as part of the application process for insurance. |
Underwritten when a claim is made. |
Claim payment risk |
Low since you have been determined to be eligible for a claim during the underwriting process. |
Higher, since a lending institution may decide that you are not eligible. |
Term insurance provides coverage for a specific period of time. For instance, typical term insurance coverage is 10, 20, or 30 years (Term 10, Term 20 or Term 30). Permanent insurance provides coverage for life. It is often referred to as whole life insurance. Since term insurance covers a fixed period of time, it is often the more affordable choice. Premiums for permanent insurance are often higher than they would be for term insurance when you are young. However, the premiums end up being lower than term insurance as you age. Permanent insurance is most suitable to protect “permanent” needs (e.g. a funeral expenses), whereas term insurance is most suitable for “temporary” needs (e.g. a mortgage).
Captive agents only work for one company. While this may be helpful in that the agent thoroughly understands a particular product, this agent is unable to access products or pricing from providers outside of their company. Independent brokers, on the other hand, work solely for you. The job of independent brokers is to home in on your specific needs. These brokers can shop the insurance market for you in order to find the best product and price to suit your needs. Brokers have access to a variety of insurance companies, and therefore have a breadth of knowledge in regards to the products and prices offered by different companies.
About the Author
Amir Eny is an independent life insurance broker. He is a graduate of York University, where he received his BAS specializing in finance. Amir has been helping families with their life insurance needs since 2009.
He has always had an interest in financial planning and graduated from York University with his degree in finance in 2008. Upon graduating, he started working in the investment planning industry. It was during this time that he was introduced to the specific benefits and security associated with insurance protection. Ever since, he has been solely focused on providing families with the peace of mind that insurance brings. Amir provides a range of insurance products and services. He works diligently with his clients to find the best products to suit their needs. In his spare time, Amir enjoys spending time outdoors with his wife and twin sons.
Good article. To the comparison table, I’d add that with bank/creditor insurance you only get a certificate to evidence that insurance MAY exist. That certificate is subject to a master policy contract that is NOT DISCLOSED; however, that master policy contract ultimately governs whether you have insurance, and to what extent. Secondly, I’d also add that with most (but not all) independent (“individual”)insurance, your acceptability and cost are established prior to the issue of the document of insurance. With “bank”/”creditor” insurance, the determination of your acceptability and qualification is often deferred to the time of claim. When your application is approved, you need to know that you are approved for coverage, not just approved to pay premiums.
Thanks Ami. Good points!