This article provides a comprehensive comparison between life insurance and mortgage insurance, with a focus on the Canadian context. Specifically, it outlines ten reasons why opting for bank mortgage insurance might not be the most beneficial choice.
In this discussion:
– Understanding Mortgage Insurance
– Do You Need Mortgage Insurance When Buying a House? – Ten Reasons to Reconsider Bank Mortgage Insurance
– The Advantages of Choosing a Broker Over a Bank
– Frequently Asked Questions about Life Insurance Versus Mortgage Insurance
Mortgage Insurance: An Overview
Mortgage insurance, also known as mortgage default insurance or creditor insurance, is designed to safeguard mortgage lenders in case borrowers default on their loans. In Canada, this type of insurance is mandatory for homebuyers making a down payment of less than 20% of the purchase price. However, if the down payment exceeds this threshold, mortgage insurance isn't obligatory.
While mortgage insurance offers protection to lenders, it may not be the best option for the borrower. Life insurance, for instance, not only provides resources to cover funeral costs but also covers outstanding mortgages and other financial responsibilities.
Is Mortgage Insurance Necessary When Buying a House?
The short answer is no, unless your down payment is below 20% of the purchase price. In such a scenario, you'd be entering into a high-ratio mortgage, and mortgage insurance would be compulsory. If your down payment is 20% or more, mortgage insurance isn't required.
Why You Should Rethink Bank Mortgage Insurance
1. Post-Underwriting: With bank mortgage insurance, your eligibility is determined after a claim has been made, which could result in denied claims despite years of premium payments. On the other hand, life insurance policies are underwritten at the time of application, ensuring guaranteed benefits.
2. Cost: Mortgage insurance can be costlier than independent life insurance policies due to its limited features, increased overall mortgage costs, and in some provinces, a provincial sales tax on premiums.
3. Portability: Mortgage insurance may be void if you refinance or switch lenders, while a life insurance policy remains with you, regardless of any changes to your mortgage.
4. Named Beneficiary: Unlike mortgage insurance, which directly pays off your loan, life insurance allows you to designate beneficiaries who can choose when to use the funds.
5. Declining Benefit: As your mortgage decreases, so does your mortgage insurance coverage. In contrast, life insurance coverage remains constant.
6. Convertibility: Individual life insurance policies offer the option to convert to a permanent solution without medical qualification—a benefit not provided by bank-owned mortgage insurance.
7. Preferred Underwriting: Independent insurance policies allow for preferred rates based on health status, an option not given when applying for mortgage insurance through banks.
8. Consolidation of Benefits: Adding additional benefits like income replacement or child care to your life insurance policy can result in discount tiers and simplified coverage understanding, a feature not available with bank mortgage insurance.
9. Expertise and Licensed Insurance Professionalism: Life insurance brokers are licensed professionals who can provide a range of coverage options from various companies, unlike bank staff who are limited to selling their institution's insurance products.
10. Market Variety: Purchasing life insurance through a broker allows for market comparison and tailored solutions, a contrast to banks' one-size-fits-all approach.
Choosing Between a Bank and a Broker
If mortgage insurance is necessary for your situation, engaging an insurance broker rather than a bank can provide more flexibility and tailored solutions, ensuring you get the most suitable coverage for your needs.
Additionally, consider disability insurance and critical illness insurance, which can protect you if you become unable to pay your mortgage due to severe illness or injury.
Frequently Asked Questions
1. What is mortgage life insurance? 2. Is mortgage insurance mandatory in Canada? 3. Does mortgage insurance coverage expire? 4. Can you cancel mortgage life insurance?
Remember, while this article provides valuable information, it's essential to consult with a licensed professional to understand the best insurance options for your needs.
