Mortgage life insurance is an awful financial product

Posted on by in insurance, mortgage, personal finance, real estate.
Mortgage Life Insurance 8

Mortgage life insurance seems like a good idea

 

At first glance, mortgage life insurance obtained from your bank sounds like an excellent idea. You’re buying a home for your family and sign up for a loan that will take decades to repay. While you’re signing documents for your mortgage, your bank rep mentions the benefits of getting mortgage life insurance - peace of mind, complete repayment of your mortgage in case you or your spouse pass away, and relative low cost (when compared to your mortgage amount that is). Sounds like a responsible thing to do to protect your family, right?

Mortgage Life Insurance

Mortgage Life Insurance

When we bought our home few years ago, we had this exact conversation with our mortgage specialist. Fortunately, I had enough brain cells to say that I needed more time to research it, and I started digging around. After looking into details of the mortgage life insurance offered by the bank, I found several reasons why it’s an awful product, and should be avoided at all costs - unless your hobbies include wasting money.

 

Mortgage life insurance is too expensive

 

Just out of curiosity, I’ve looked up the cost for mortgage life insurance on TD Canada Trust website. For example, you’re buying a small house and taking out a mortgage of $400,000. To obtain life insurance for a mortgage of this amount, you and your spouse (in my example you’re in your 30s) will have to pay $105.00/month (after generous 25% discount). If your mortgage amount is higher or if you and your spouse are older, the monthly expense will be higher.

 

Mortgage Life Insurance

Mortgage Life Insurance

 

This is extremely expensive when compared to simple term life insurance that can be obtained through independent brokers. Similar coverage of term life insurance would cost you less than $40/month and offer more to you - as I discuss it late. Even our life insurance policy offers superior coverage and flexibility.

While $105.00/month might not seem like a big deal when compared to your mortgage payment, the value just isn’t there. Also, keep in mind that your coverage will be going down as your mortgage is being paid down - while your premiums will stay the same.

 

No guarantee of paying out

 

Typical life insurance policy obtained through insurance broker is actually underwritten when you sign the contract and the risk is assessed prior to this. Once you enter the contract, the payout is guaranteed in case you or your spouse die. Insurance agencies take this step very seriously, and take every step possible to assess your health before the policy is signed. In our case, we had to go through a medical examination performed by a registered nurse to make sure our level of health is reasonable and we are insurable.

Mortgage life insurance is a bit different in a sense that it’s underwritten at the time of the claim. Bank won’t access your health prior to signing the documents; you simply fill out a short questionnaire about your health. If the unthinkable happens, the bank can actually deny the coverage simply because you weren’t insurable. The fact that you didn’t know about your heart condition won’t make any difference.

Check out this episode of CBC Marketplace on mortgage life insurance:

 

 

 

Mortgage life insurance is controlled by the bank

 

If I had mortgage life insurance for our home, and got hit by a bus, the payout would go straight to the bank holding my mortgage because the bank is the beneficiary for the insurance policy. My wife wouldn’t be able to make a choice on what to do with insurance money - it would simply pay off our mortgage. In case of private insurance, the proceeds would be given to my wife tax free with her choice of actions - pay off the mortgage, invest the money, or build a giant Rocky-styled statue of me.

Another thing to keep in mind is that your mortgage life insurance policy is attached to your mortgage. If you sell the house - the policy gets canceled. If you renew the mortgage - the police needs to be renewed. If you miss a payment - your policy gets compromised. In other words, you have no control over it whatsoever.

 

Why do banks offer mortgage life insurance?

 

Mortgage life insurance is an easy sell for bank employees to push to their clients as an added bonus. Any responsible adult would think about protecting their family from unexpected death. But mortgage life insurance offered by most banks is not the right way to do so. In reality, it protects the banks more than it protects you. It is also a great money maker for them given extremely high price and poor value of it to the consumer. No wonder bank employees are told to push this awful product!

 

What is the right way to go?

 

Don’t get me wrong, protecting yourself and your family is important and insurance can be a beautiful thing. It is your responsibility to make sure your family won’t suffer financially if you or your spouse suddenly passes away.

But mortgage life insurance offered by the banks is an awful product that offers very little  value. If I were you, I’d consider obtaining term life insurance from an independent insurance company. You will be able to control the coverage amount and what happens if the policy pays out. Your premiums will also be much lower than what the bank will offer you - and who can’t use some extra money these days?

My name is Financial Underdog, and I’m not impressed with mortgage life insurance!

  • Amen! I 100% agree with this. Mortgage life insurance is a terrible product. Definitely get standard term life insurance instead. If everything else were equal, it would still be MUCH better to have the money yourself and decide how you would best use it (paying off a mortgage at 3-5% interest likely isn’t the best use of that money…)

    • Financial Underdog

      It’s great to agree on something!

  • Louise - Mortgage Broker

    Unfortunately there is a lot of misinformation in this article. Several mortgage insurance providers do underwrite at the time the policy is applied for and many are transferable to another property and the coverage continues. I would suggest that you do more research instead of making blanket statements. The purpose of mortgage insurance IS to pay out the mortgage. You should always have other insurance to cover you outside of mortgage insurance.

    • You don’t believe that a regular term insurance policy of a suitable amount wouldn’t be enough to protect yourself? It should be more than enough; as well, you wouldn’t need as much if you could be more flexible in it’s use. Paying off a mortgage entirely may really not be all that necessary. Sure, your mortgage is paid off and you could save tonnes of money in cashflow per month, but you are left with an asset that you can’t liquidate easily (your home) and no extra cash.

      If you looked at the total amount of insurance you would need to be comfortable through term insurance + mortgage insurance, and compared what it would look like with just term insurance, you would definitely be ahead with only term insurance.

    • Financial Underdog

      Louise,

      I’m sure there are better products on the market, and being a mortgage broker you probably know about them. But unfortunately, an average consumer doesn’t. An average consumer goes to a big bank for a mortgage, and gets offered mortgage life insurance that is way too expensive and comes with serious shortfalls. If they’re using a good broker that can educate them about it - hey, that’s great. But what if they don’t? At least they’ll know which questions to ask.

      Thank you for your comment!

  • Kimothy Ann

    I am unable to get term life insurance for my hubby due to pre-existing health issues. I was able to attain some very expensive whole life/burial type, very low payoff. This looks like a round-about way to get insurance under his name, on the chance he passes early on during the mortgage. We have plenty of insurance on me; he would be fine financially combining private term & whole life on me combined with what my employer offers. So, we have been short on insurance for my hubby.
    Does this seem feasible? Products we get in the mail always say “just answer these 3 short questions”, but those very questions are the ones that kick us out. There are zero products out there, available to the general public, that will accept my husband’s pre-existing health history.

    • Financial Underdog

      To be honest, even mortgage life insurance would probably wouldn’t work for you as they have a awful track record of not covering pre-existing problems. Not sure if this is a solution.

  • Dave

    There are other considerations here as well. One of the largest is the value of the insurance at claim time. In the above example of a $400,000 mortgage. On day one, you pay $105 for the policy. If you or your spouse die on that day, the policy would pay our $400,000 - not too bad. But, over time, the payout gets smaller and smaller. What happens if your spouse dies the day before the last payment? Then, the policy will pay out about $1500. You still paid $105 for protection that month, but, since there is only $1500 owing on the mortgage, that is all that will get paid. Term insurance on the other hand, pays out the full face value, no matter what is owed on the mortgage. So, in this example, should your spouse die the day before the last payment, at least you will get to pocket the other $398,500.