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.

mortgage life vs individual life
Mortgage Life vs Individual Life

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 prevention policy.)

Mortgage Insurance News

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    Mortgage Insurance can be dangerous. 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. In a recent article titled "Mortgage Insurance Policies May Not Cover Claims," she highlighted the danger of post-claim underwriting. This is when the policyholder has filled out their application and has been diligently paying their monthly premiums, but when ...

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  • The Top 5 Life Insurance Loopholes with Ellen Roseman

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    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. Mortgage insurance is typically sold by banks when you get your mortgage as a means to pay off your mortgage when you pass away. However, the approval for the policy is done after you've already been paying the premiums, and often, people are denied coverage at the time they need it because the ...

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    Christine McCarthy in happier times. 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. Her husband's name was Charlie* and he was an abusive alcoholic. The night before his death in April 2003, he had already been arrested for assault on Christine and was out on bail with a restraining order not to come within 30 feet of Christine or her children. "The night ...

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  • Mortgage Insurance and Post-Claim Underwriting

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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.

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jagdeep sohal
jagdeep sohal

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

Isabel
Isabel

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.

ANGEL
ANGEL

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… Read more »

piyush
piyush

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

sonya
sonya

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.

Malek
Malek

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… Read more »

Mitch Reynolds
Mitch Reynolds

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

LuCynda
LuCynda

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… Read more »

Francis
Francis

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.

Syed Raza
Syed Raza

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

Roland
Roland

Hi There,

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

Thomas
Thomas

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

Rob
Rob

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

Brian So
Brian So

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.

Louis
Louis

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

LSM Insurance
LSM Insurance

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… Read more »

rick
rick

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

James
James

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

Maria Teresa Fernandez de Castro
Maria Teresa Fernandez de Castro

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?

Art
Art

My husband and I took out a mortgage with …. six years ago. The mortgage went into default in 2012 but we were still making full payments on the loan during the months it wasn’t every month but we would still make payments. He became ill in 2012 and he passed away in 2013 from he pass away from heart attack. I notify the bank that he pass away they ask me to bring in the death certificate and they gave me a claim form to take to the hospital. I ask them if they were paying off the balance… Read more »

Andy Suboch
Andy Suboch

Without looking at the mortgage documents it is impossible, in my opinion to advise as to whether you may or may not have a cause of action as against Scotiabank or any other party based on what is set out below. In many mortgage insurance policies, there is a requirement that the mortgage be in good standing and all payments be made at time of death. It seems that might not be the case below. However, a Court might be able to grant relief against forfeiture if it were just to do so. I would need to more thoroughly review… Read more »

Gloria & Norm
Gloria & Norm

Hi there::

Is there any company who can provide mortgage life/disability insurance for people over 65? Thanks.
Norm

Jessie
Jessie

I purchase a house 3 yrs ago but for health reasons I was turn down. If I die what happens to my home do the bank take the house and sell or are my children who would be my benefitiers responsible. I have 2 term life insurance for 100,000.00 can the bank take this for the mortgage. I don’t have a will done yet but in the process of getting one done. For this term insurance I pay close to 400. Mth because of health issues I had bladder cancer but have been cancer free for 4 yrs I also… Read more »