If you have (or have ever had) a mortgage, you’ll know that the bank will often push mortgage insurance on you when you’re signing on the dotted line. Now to be clear, this is the additional insurance your bank will offer you when you get a mortgage and not the CMHC insurance that is required when your down payment is less than 20%. Sometimes the bank will even go so far as to assume you’ll get the coverage and you’ll actually have to opt-out. They’ll throw out some small premium amount that will just get tacked into your mortgage payment, and you’ll think sure, sounds great…but does it. Ok, I already spoiled this with the post title…but no, it shouldn’t sound so great.
Now don’t get me wrong, insurance is necessary, especially when it comes to covering your debt but there is a better way of doing it. Let’s first figure out what exactly mortgage insurance is. Sounds simple enough, it’s insurance to cover your mortgage. If you pass away the mortgage insurance will step in and cover the balance of your mortgage. The problem is that the balance you owe on your mortgage continues to go down as you make your payments, but the premiums you pay will remain the same. See the problem? You’re basically paying the same amount for less and less coverage. At the beginning of your mortgage term this isn’t so bad, but the more you pay off, the less money the bank will have to pay up. Plus, the payout goes straight to the bank, so you have no control over it. Not so great now huh?
A better option is to look at getting term life insurance in an amount that will cover your mortgage. A term life insurance policy will more than likely be cheaper than mortgage insurance, the payout will not decrease, and that payout will go directly to the beneficiary who can then use it for whatever they want. The amount of term insurance you get is also not tied to your mortgage, so if you want to get coverage for more than just that you can. This can be especially helpful if you have children and would like to leave money for their care and/or education. Life insurance will also stick with you for as long as the term whereas you will need to reapply for mortgage insurance anytime you move your mortgage.
Cheaper, guaranteed payout amount and no need to renew if you change mortgage holders…lots of positives!
Let’s work through an example just to highlight this. Pretend you took out an original mortgage for $300,000 and paid it down to $200,000 after 4 years before tragically passing away. If you had mortgage protection insurance through your bank, they would eliminate that remaining $200,000 balance, and your beneficiary wouldn’t have to worry about. Not bad, but what if you had skipped the mortgage insurance and instead gone with a term life insurance policy for $300,000. In that case, your beneficiary would (let’s assume it’s your husband) receive a cheque from the insurance company for $300,000. With that money, he could decide to pay-off the mortgage or continue making mortgage payments as before and invest that money, or set some aside for any children you have, or go on a fancy trip. Maybe some options are better than others 😉 but you get the jist…more money overall and more flexibility on what happens to the money.
If you thought mortgage insurance initially sounded like a good idea and did sign up for it through the bank, don’t worry. Most policies can be cancelled, you’ll just need to give them a call. If not then just make sure you don’t reapply at your next mortgage renewal.