The Purchase of a Home

The purchase of a home is a huge step at any phase in your life. Whether you’re buying your first home, upgrading to a larger home for your family, or buying a revenue property, it’s a big deal. The excitement of making such a big move can make anyone a little nervous. Is it the right choice? Am I paying too much? Am I overlooking anything? Do I have the right insurance? Should I get the Bank Mortgage Life Insurance?

What Insurance is Required?

Obviously, we know that having property insurance is a requirement, rather than an option. That’s why making sure you have the coverage you need is important, and your general insurance agent will advise you accordingly. As well, you’ll need to pay for CMHC Mortgage Default Insurance if you’re putting less than 20% down. This is a requirement with all lenders because it protects them against the risk of a borrower defaulting on the mortgage.

While CMHC Mortgage insurance may be a requirement, it should not be confused with Bank Mortgage Life Insurance which is not a requirement. This is an insurance policy on which qualifying is very simple. It protects you with a benefit that pays off the principal outstanding in the event of a loss of life. Often enough the lender will simply add it to the mortgage as one neat package and then explain it afterwards as they are required. In theory it’s a great product. It’s easy, simple and very hassle-free, so why not just get it? When you’re already making a mortgage payment of $600 bi-weekly what’s another $50?

To put it plainly, it’s too much. Rarely is there a situation where this Mortgage insurance would be less expensive than a standard life policy (In fact, I’m yet to see it). Not only that, but if you’re going to buy an insurance policy, wouldn’t you like to have a say in who the beneficiary is? You should know that the benefit payment from loss of life on these policies is not awarded to the homeowner. It’s awarded to the lender. That’s right, the lender is the beneficiary on this expensive policy. Not your spouse, not your sibling, not your child, not anyone you would choose. The lender gets the benefit from claims awarded on the Bank Mortgage Life Insurance Policy.

Facts of Bank Mortgage Life Insurance

So, if you buy this Bank Mortgage Life Insurance, you’re basically paying for a policy which pays the bank and will cost too much, but that’s just the tip of the iceberg. Here are a few other things to consider.

  • The lender makes it very easy to get their coverage by doing little to no underwriting at the time of application. The underwriting they do undertake is often in the form of a long confusing run-on question which asks you about dozens of illnesses without explaining them in specific. It’s easy to make mistakes or innocently answer something incorrectly due to the lack of clarity with the medical questions. Since the details of these questions are not explained to you nor handled by a licensed advisor, it’s easy to overlook health concerns.
  • “Post-Claim Underwriting” – The banks usually have a very stringent and precise underwriting system. The problem is that it only happens at time-of-claim which can put you at a higher risk of being declined a benefit payment at claim time. This is obviously the least favourable situation of all. If nothing else, be sure to inquire about the underwriting and when it happens. Keep this in mind when considering the purchase of any life or health policy you ever purchase. Time-of-claim underwriting is very risky and highly discouraged.
  • The lender is the beneficiary. The mortgage must be paid off with the proceeds even if that’s not the best use of the funds.
  • If a benefit is paid out, it will only cover the amount owing in principal on the mortgage, despite the fact that the premium will never go down. This means that even though the benefit amount is constantly going down as you pay off your mortgage, the premium remains the same.

Question: Would you buy a $400,000 life insurance policy that gradually whittles down to $200,000, but still pay the same premium? Probably not, because it doesn’t make sense.

  • It only covers the mortgage. If you have other needs, you’ll have to buy a separate policy to cover those needs.
  • You may need to renew the policy each time the mortgage is renewed. Renewal is not guaranteed, so being older at renewal means you’ll pay higher premiums.
  • It’s not portable. If you change lenders you will need to get new insurance. Again, being older at renewal means higher premiums.
  • Depending on age and health, premiums on mortgage life insurance are almost always higher than they would be for an individual term life insurance policy. There is no discount for being healthy which becomes especially noticeable as you age.
  • It’s not convertible. You’ll never be able to convert to a permanent life insurance policy. This can cause insurability issues for you in your later years.
  • It lapses if the property is sold. If you still need coverage, you would have to go and qualify for another policy.
  • It becomes void if the mortgage is in default, so no benefit would be paid in this case.

So, what should you do? Here are your options…

  • You can buy Bank Mortgage Life Insurance from your lender. You can pay a higher premium for a lesser policy that pays a benefit to your lender or potentially won’t pay a benefit at all.

OR

  • You can buy an Actual Life Insurance Policy from an Actual Life Insurance advisor and get your money’s worth. You can have the piece of mind that this policy WILL be underwritten before it goes into force and that a benefit WILL be paid in the event of a loss of life, because the insurance company knows the risk they’re taking, and they have chosen to insure you.

The choice is yours of course, but don’t take it from me. Talk to any insurance advisor. It’s your life and your investment. You should be well informed about any decision you make in that regard. If you’re not sure about an insurance policy, you should get advice from a few advisors to be sure you’ve got the right information. Keep in mind that lenders are not insurance advisors, they are lenders. We as insurance advisors leave the lending up to them. It only makes sense to leave insurance advisory up to us.