When Jody Ahern and her partner bought their first home, a one-bedroom condo in Vancouver, they were equally excited and nervous. They also found themselves somewhat overwhelmed when it came time to decide on purchasing mortgage life insurance.
Not to be confused with Canada Mortgage and Housing Corp.'s mortgage loan insurance, which is required by lenders for buyers who put down less than 20 per cent of the purchase price, mortgage life insurance (often simply called mortgage insurance) is presented by some banks and credit unions as coverage that would kick in if you were to die or become seriously ill. It is often described as "just in case" coverage that would allow you to stay in your home if you ended up in the dreadful position of not only grieving but also being unable to make mortgage payments on your own. On the surface, it sounds comforting and logical.
"It really seemed like something we would be crazy not to get," says Ms. Ahern, who was offered the insurance by the bank that issued their mortgage. "If something happened to one of us, it would be nice not to have to worry about mortgage payments. But we didn't really understand how it all worked."
They talked to their financial planner, who suggested term life insurance over mortgage insurance. In fact, financial experts widely agree that mortgage life insurance isn't all it's cracked up to be.
The biggest point against mortgage insurance is that it protects the lender, not you, explains Glen Melnyk, a consultant at Investors Group Financial Services in Winnipeg.
"It covers only the exact amount of your mortgage, and your coverage decreases as the mortgage is paid down," Mr. Melnyk says. "This means you have no coverage when the mortgage is paid off, and should you die while the mortgage is active, the dollars go to paying off the mortgage only. There is no cash value, no premium flexibility, and no ability to move to a permanent life insurance plan.
"Premiums remain the same even though the value of the insurance benefit decreases as the mortgage is paid," he adds.
The numbers could look like this: Say you get mortgage insurance for $250,000 and pay roughly $50 a month in premiums, then something happens to you when your mortgage is down to $100,000. The payout of the policy is only going to be on the remaining balance, even though you have been paying premiums on the original amount all along, explains Callum Greig, franchise owner of DLC – Prime Mortgage Works Inc. in Victoria.
On the other hand, "If you get term insurance for $250,000 … and something happens to you and your mortgage is $100,000, you're paid out on the full amount of $250,000," he says.
Another thing to be aware of, according to Mr. Grieg, is the lender – not the homeowner – owns the policy and can cancel or change it at any time. If you switch mortgage lenders, meanwhile, your insurance is not transferable.
The other factor that is not always explained clearly to home buyers, especially first-timers who are new to the language of mortgages, is that mortgage life insurance is typically underwritten post-claim. That means that eligibility is often only determined and medical records only scrutinized when it comes time for a payout. And people can be denied at that point.
"Most mortgage insurance underwriting is done post-death, as opposed to life insurance, which is done before the policy is issued," Mr. Melnyk notes. "Usually, [with mortgage insurance] a few boxes have to be checked off, and once you do, it's a legal document. For example: Have you been to a doctor in the last six months? Yes or No? If you check No, forgetting that you did visit a walk-in clinic for antibiotics, you have answered untruthfully, voiding the insurance. There are many examples of post-underwriting that have left families devastated due to a simple mistake.
"I always communicate to clients, you've worked hard to find the right home, shouldn't you take the time to find the right protection for you and your family?" he adds. "Don't protect the debt; protect yourself. Your beneficiaries can choose how to use the funds: to pay off the mortgage, provide an income, or take care of a more immediate need. It's their choice, not the lender's."
Also, people who sell mortgage insurance do not need to be licensed, unlike those who sell life insurance. Lenders that offer the product call it an "incidental sale." Mr. Melnyk would rather home buyers look at other, more flexible options within an overall financial plan.
"With mortgage insurance, you're not really getting an insurance analysis," he says. "Say someone passes away. Maybe the spouse doesn't want to pay off the mortgage; maybe they want to take time off to look after the kids and get their life back in order. Or maybe the wisest choice is not to pay out the house with today's low interest rates. Your beneficiary has no choice about how to use the funds at a time when funds may be required most."
Another pitfall is that, once the mortgage is paid, your coverage is gone, and by that point, you might not qualify for life insurance. With term life insurance, by contrast, converting it into universal life policies or other strategies can be put into place.
Millennial money expert Kyle Prevost, co-founder of the Young and Thrifty website, says that mortgage life insurance is generally not a beneficial product.
"The average person is way better off simply shopping around and negotiating for the best price on a straight term life insurance policy that runs the same length as their mortgage if they want to protect their family from the financial disaster that could accompany a tragic loss," Mr. Prevost says.
Mr. Greig notes that he stands to earn a commission from selling mortgage insurance – but he still avoids it, unless his clients insist on buying it.
"I think it's important to have adequate coverage, but my personal take is, if I wouldn't take it, why would I put it to my clients? I go over this with my clients and I have to get them to sign waiver that they're not covered; it's one of the most awkward unselling jobs I do.
"I have a ton of first home buyers, and they're absolutely susceptible; they've been told by their parents or someone else they need to get this," he says. "It's really tough for me as a mortgage broker that wants to get referrals from clients' friends or family to recommend a product I have real trouble getting behind."
He recommends exploring what kind of insurance people already have in place through work and seeing a financial planner who can discuss various insurance needs.