Mortgage Insurance

While often not required by the financing institution, mortgage insurance is a prudent purchase for most homeowners. Banks typically use the ambiguous term “Mortgage Insurance” but rarely define what you are actually paying for. For clarification purposes mortgage insurance will be broken down into three separate types of insurance.

· Life Insurance

· Disability Income Insurance

· Critical Illness Insurance

Life Insurance: The reasoning behind buying mortgage life insurance is fairly easy to understand. If you are married and have a family that relies on you to provide an income, what would they do if you died and that income stopped? Aside from the obvious emotional trauma, money would be tight, mortgage instalments would go unpaid, and foreclosure and bankruptcy would loom.

By purchasing life insurance you are able to use the cash benefit to pay off your mortgage debt entirely, pay off the portion supported by the now deceased spouse or use interest earned on the benefit to pay the monthly instalment.

Mortgage life insurance is typically bought on a Joint First to Die basis, this means that two people, usually spouses, are insured under one contract. The first person to die triggers the death benefit, which is payable to the survivor. After the first death the contract ends. Personally I don’t like these types of policies for several reasons listed below, I prefer to always use two individual policies.

· They don’t provide any real cost savings over two separate policies.

· They can be cumbersome to split in the event of a marriage breakdown.

· Some policies do not pay out double if both insured die in a “joint disaster” such as a car crash or plane crash.

Life Insurance also comes in several different term lengths. For the purposes of this discussion I won’t get into permanent insurance. Policies typically have a rate guarantee based on either 10 or 20 years, flexible policies are also available which can extend the rate guarantee to 35 or 40 years. The longer the rate guarantee the higher the monthly premium, though longer term policies are typically cheaper in the long run. Two back to back 10 year terms typically cost about 33% more than a single 20 year term. The decision to go with a 10 year or 20 year policy often comes down to a matter of cash flow.

When looking for life insurance, always ask the sales person if they are a broker or if they are affiliated with a specific company. Investors Group and Freedom 55 are examples of “captive agents” they can only sell IG or F55 products, even if they are not the best price or fit for the client. A broker is your best bet to get the best deal, brokers use a software program called LifeGuide which provides a list of all the available rates for all the insurance companies in Canada. Ask to see a printout of the top 10 companies, and ask why he is recommending the company he has chosen for you.

Brokers won’t always recommend the cheapest company all the time, and there is usually a good reason for this, either contracting, poor past experience, poor contract wording etc. We are paid by commission so there is a financial incentive to sell a more expensive policy as it will pad our wallets. Some companies also pay more than others, that shouldn’t be the only reason the broker chooses that company. We are also required to disclose how we get paid, by commission, but we do not have to tell you how much we get paid, unless you ask. As long as you are dealing with a reputable broker you shouldn’t have much to worry about.

I am happy to provide the inside scoop on the insurance industry, if anyone has any comments or questions about the life insurance industry post in the comments.

Rob Reynolds

Partner / Group Accounts Manager

HMR Employee Benefits Ltd

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.