This is a situation many Canadians have found themselves in. Granted, purchasing the mortgage insurance offered by your lending institution is better than no coverage, but there is a much better, typically cheaper alternative out there… Term Life Insurance.
Mortgage Insurance is designed to pay off your mortgage balance owing in the event of your passing. This benefit is paid directly to your lender.
Term life insurance is designed to protect your family in the event of your passing for things such as your mortgage, income replacement, final expenses or a child’s education. The benefit is paid to a beneficiary of your choosing.
Mortgage Insurance with Bank
Term Life with Insurance Company
Use of Funds
Let’s breakdown a few of these comparisons for further analysis:
With mortgage insurance the bank is the owner of the policy, meaning that you have no rights or options to amend the policy. Also, if you switch banks in the future to secure a more competitive mortgage, you start from scratch with a new mortgage insurance policy as it is not transferable to another financial institution. In this situation of switching lenders to get a more competitive mortgage, the premiums/cost for your new mortgage insurance policy will be more expensive as your rates are now based on your current age.
Comparing this with Term Life Insurance, you own the policy. This means that regardless if you switch lenders in the future your policy remains in force and unchanged. Also as the owner of the policy you can also amend it in the future to suit your needs, for example you can change beneficiaries, add children to it or convert it to a permanent life insurance policy.
“Insurance Benefit” and “Cost/Premium”
Since Mortgage Insurance is tied to your mortgage, as you pay down the mortgage balance the mortgage insurance benefit also reduces. Also, every time your mortgage renews, typically every 3-5 years, the cost/premium of your mortgage insurance policy increases as it is based on current age. Therefore, you are paying more money for less coverage over the course of time.
Term Insurance has a level Insurance Benefit as well as level cost/premium. Consider the following example if you had a 20 year term insurance policy for $500,000 and the cost was $50/month. Regardless if you passed away in year 2 or year 19, your beneficiary would receive $500,000. Also, the cost of $50/month would not change until year 20 and at this point, as the owner of the policy you would have options. You could choose to renew the policy, convert it to permanent life insurance or reduce the $500,000 payout.
When policy is “Underwritten”
Most importantly is considering when the policy is “Underwritten”. Underwriting is an insurance buzzword but basically means reviewing the risk and agreeing to accept the risk.
With a Mortgage Insurance policy, underwriting commences at the time of a claim. This means that when you pass away the mortgage insurance company will review your application and health history to decide if the payment will be made.
With Term Life Insurance, underwriting is applied at the time of application. This means the risk of insuring your life is assessed and completed up front before premiums are paid. This is a massive difference!
One thing that many people fail to recognize is that if they pass away prematurely there are far more expenses and financial burdens left on their family than just their outstanding mortgage balance. Even if mortgage life insurance were to pay out, the family still has to pay property taxes, monthly bills, children’s education, incurred medical expense and a funeral, not to mention their monthly cash flow has taken a huge hit with the loss of an income! With Term Life Insurance you decide how much coverage you want. There is no right or wrong answer to how much term life insurance one would require; it has to be an figure that gives you peace of mind but also fits your budget. A basic calculation of how much term life insurance a person should have would be the following:
- All combined debt + $100,000 per dependent child + min of 2 years gross salary
- For example, a man with $300,000 in debt with 2 young kids making $75,000 per year should have approximately $650,000 worth of Term Life Insurance
Life insurance is an important tool in your overall financial plan. Make sure you get the proper policy that protects your family and not your bank! Consider your options and contact Dave Stewart, a senior member of our life insurance brokers’s team here at Zehr.