Here is a topic I get asked about quite often. People are shocked to know that Mortgage Insurance can actually be harmful to your financial health. Canadian Banks sell more Mortgage Insurance than all the big insurance companies combined. Although the banks are great at selling Mortgage Insurance, the real problems occur when people try to make a claim. I strongly recommend you follow this link to a CBC investigation that revealed why Canadians should beware when buying mortgage insurance from the bank: https://www.youtube.com/watch?v=qe61HVGIwUo
Here are six comparisons on Mortgage Insurance vs. Life Insurance
1.) Higher Cost- Mortgage Insurance from the bank is usually more expensive than traditional Life Insurance for the same amount of coverage.
2.) Post Claim Underwriting- Underwriting is a health screening tool that both banks and insurance companies use to see if you qualify for coverage. Insurance companies will pre-screen you for coverage before your policy is approved. The difference is that banks do their underwriting AFTER a claim is made. Why do they do this? Underwriting is expensive so they forgo this step and only use it on the few people that will actually need to make a claim. This affects people in two ways: you chance being denied coverage due to something they found in the post claim underwriting process and two your payout could be significantly delayed while the underwriting is being complete.
3.) Coverage Decreases- Mortgage Insurance covers the amount of mortgage you have left on your house. Therefore your coverage decreases with each mortgage payment that you make while your premiums stay the same or increase. Whereas with life insurance the cost of the premium remains fixed and the amount of coverage remains the same throughout the term.
4.) Portability- If you change mortgage lenders or sell and buy a new home, you will have to apply for a new Mortgage Insurance policy. The problem with this is that you will be older, rates will likely be higher and if your health deteriorates you may not even qualify now for Mortgage Insurance. Life insurance is owned by you and remains valid no matter how many times you move or refinance.
5.) How Banks Benefit- Mortgage insurance typically pays the balance of the outstanding mortgage to the bank. With life insurance, you decide where the money goes. Quite often people will use the money to pay down some of the mortgage but will use it in other needed areas as well. The option is yours with Life Insurance.
6.) Conversion- Life Insurance can be partially or fully converted at any time to a permanent insurance plan without any medical evidence. Mortgage insurance has no option to lock in your insurability.
Overall, from both a professional and personal opinion there is no comparison between Mortgage and Life Insurance. In both my business and personal life I have examples of people passing away and their loved ones having difficulty getting the payout from the bank and/ or one of the six comparisons above affecting them negatively. The good news is that if you currently have mortgage insurance it is never too late to switch or at least educate yourself further on the process.