Mortgage Insurance - Buyer Beware?

If you're the proud owner of a home, you may also be the proud (or reluctant?) owner of some mortgage insurance. Most banks and lenders recommend it, and some even make it seem like it's a mandatory purchase (it's not, but that's another topic). It's a good idea though, isn't it? For most of us, our home is the most expensive purchase we will ever make; wouldn't it make sense to make sure it's protected? Well, absolutely! ...but your mortgage insurance may not work exactly as advertised. Let's see why, and compare it with an individually-owned insurance policy.

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1. Post-Claim Underwriting: We might as well start with the worst part first - as explained well by CBC Marketplace in their exposé on mortgage insurance from several years ago, many mortgage insurance providers only go through the process of determining your eligibility for insurance ("underwriting") AFTER a claim has been submitted. In other words, the whole time you've been paying for it, you won't know if you're actually covered until something catastrophic happens and you need it to come through for you... then and only then will they fully investigate your health history to decide if the insurance will pay out... or if it won't. Individual insurance is underwritten up-front, so you know from Day 1 that you're actually covered by insurance that will pay out.

2. The bank is the beneficiary: Assuming you get through the gauntlet of issue #1, your family still receives $0. Why? Because the lender is the beneficiary of the policy. It pays off your remaining balance, but if your family's primary wage-earner has passed away, they may find themselves in a difficult situation: they have a paid-off home that they can't afford to live in, because the property tax bill is still due, the electricity still needs to be paid, and they still need to put food on the table. If the reason for buying insurance was so your family could actually keep a roof over their heads, mortgage insurance likely won't accomplish that. The money from an individual insurance policy goes to who you truly want to protect the most: your family.

3. Cost vs Benefit: The cost of mortgage insurance stays level, but the amount of coverage is constantly decreasing. Because your mortgage insurance coverage is equal to the remaining balance on your mortgage, every mortgage payment you make also lowers your amount of insurance. Fair enough, that makes sense... what doesn't make sense is paying the same high price every month for less and less insurance! Your mortgage insurance also renews at the same time as your mortgage, which means that the cost of your insurance will actually increase every 3-5 years (individual insurance renews typically no sooner than 10 years). Individual insurance has a level payment for a level amount of coverage, and is more cost-effective in the short term AND the long term.

4. Limited Options: Mortgage insurance is nearly always set up as a "joint-first-to-die" policy, which means that it pays out once, when either you or your partner passes away, and then ceases to exist. As discussed in point #2 above, a family's need for insurance typically goes far beyond their mortgage, and if a family member has passed away, their surviving family likely still needs protection, perhaps now more than ever! Individual insurance can be tailored to your specific needs and your family's exact situation.

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Protecting your family is absolutely something that should be on your mind when you reach life-changing milestones - buying a home included - but not all options are created equal. We may be slightly biased, but hopefully in the same way you are yourself: biased towards the option that is truly best for your family. If you're in the market for a new home, or have a mortgage insurance policy you'd like an informed second opinion on, we'd love to have a conversation with you.