Navigators (and our affiliates at McLean Hallmark Financial Ltd) are here to help when you are buying a new home. Mortgage insurance, also referred to as mortgage default insurance or mortgage life insurance, is a life product sold through most banks and is not a traditional life product sold by independent brokers. Mortgage life insurance is designed to pay a lump sum death benefit equal to the outstanding mortgage owing at the time of death. This sounds all good however there are pitfalls to this product that you need to be aware of.
What Is Mortgage Insurance?
Sold mainly through banks when they are arranging your mortgage it is designed to decrease in value at the same pace your mortgage is being paid off. In most cases you will be approved up to a non-medical evidence limit set by the insurance company. This means no medical questions will be asked of you. This on the surface is a very easy process and requires no disclosure of your current medical condition and overall health. However, in order for the insurance company to protect itself from any adverse death claims, a pre-existing medical clause is added into the contract. If you die as a result of a medical condition that was apparent prior to the signing of the application the insurance will not pay out a death claim. In most cases the beneficiary does not find this out until their partner has passed away. Not a good solution to paying off your mortgage.
If you do not have any pre-existing medical conditions prior to the signing of the application the policy will respond at death. However the death proceeds are paid to the bank and not to the named beneficiary. The surviving partner should always have the death process paid to them directly. This allows the beneficiary to reassess their current financial situation and determine if it is the best time to discharge their mortgage or not. The pricing of mortgage life insurance does not apply any discounting in the premiums you pay if you are a non-smoker. We have found that some of our clients were paying as much as 50% more for mortgage life insurance as a non-smoking male or female.
Does Mortgage Insurance Differ From Term Life?
Indeed it does. For some of the reasons already mentioned, mortgage life insurance in our opinion is not a good value when compared to a term life insurance.
Mortgage life insurance has a decreasing death benefit whereas a term life policy has a fixed death benefit. You can select the term period that best suits you and your mortgage with a term life policy.
Premiums are discounted if you are a non-smoker, whereas for mortgage life insurance the premiums used are based on a blended smoker and non-smoker calculation. The premium you pay under a term life policy are guaranteed for the term period you have selected. Mortgage life insurance premiums are not guaranteed and can be changed by the insurance company with 30 days written notice to the policy owner. In some cases the premiums are only guaranteed for the initial term of the mortgage.
Your term life policy can never be cancelled unless you what to cancel the policy. The bank’s insurance company does have the right to cancel the mortgage insurance program written through the bank. You have the option in a term life policy should you ever become uninsurable to change your term life policy to a permanent policy without providing medical underwriting. A mortgage life policy will not allow you to convert your coverage to a permanent plan at any time no matter how good or bad your health is.