Congratulations! The sale is final – the house is yours!
…you’ve got a million things to do, not to mention getting your financing together, planning your move & renos!
You get the idea.
As the closing date approaches, your broker emails you the mortgage contract. You fill it out as per the instructions – including the one-page application for TD mortgage insurance attached to the back. Hey, it could just as well be RBC, BMO or Manulife mortgage insurance. Take your pick, mortgage insurance from any bank is pretty much the same.
It’s just one of a million papers so you think nothing of it – a small detail and you’ve got way more important things to worry about…
…like watching Netflix. I joke, but seriously there are a lot of things you need to wrap up before you move.
The rub is, this piece of paper is VERY important. Maybe not now but at some point when the dust settles you’re going to take a second look at that fine print and wonder why the heck you signed it without thought.
Now, I'm going to show you why it's important and how you can save thousands of dollars over the course of your mortgage with one simple trick!
...But Before We Get Started - Who Am I and Why Do I Care About Mortgage Insurance?
My name is James Heidebrecht and I’m the founder of Policy Architects. Life insurance is my business, but the thing that really makes Policy Architects stand out is that we look at each one of our clients as a client for life. Sure I can simply sell you a policy to help your family get through the tough times if you pass away unexpectedly, but that’s just not enough.
The true value of an independent life insurance agent is their ability to find the right policy for you and your personal circumstances. This means taking all your unique details into consideration BEFORE making a recommendation. At Policy Architects, we thoroughly research and review the best life insurance companies in Canada so we can provide you with the most suitable coverage at a good price. All life insurance products have a sales commission built into the cost whether you buy online or directly from a bank. Why not get the biggest bang for your buck and use an experienced independent agent?
If you’re in the process of purchasing a new home, life insurance planning is even MORE important than ever. That’s why I wanted to write this article. A personal life insurance policy works far better than the “coverage” you purchase from a bank when you buy your home. Let’s take a look at the details right now. You’ll thank me because making the right decision here can save you 10’s of thousands of dollars over the decades.
What is Mortgage Insurance Anyway?
Many people think the words mortgage insurance and mortgage life insurance are interchangeable but there’s a difference. Real mortgage insurance is the loan protection you’re obligated to buy from the Canadian Mortgage and Housing Corporation (CMHC) when your downpayment on a new home is less than 20% of the value.
Mortgage life insurance, also known as creditor life insurance, is a product sold to consumers by banks. It’s usually sold to you by the financial institution where you’re borrowing the funds for your mortgage. It can be confusing because banks market this product using the words mortgage insurance. For example, RBC’s mortgage life insurance product is called RBC HomeProtect Mortgage Insurance.
That aside, the most important thing to remember is that Mortgage life insurance is an insurance policy. Most people who buy a property think it’s in place to protect them – but if you sign that paper it’s going to protect the lender NOT you.
Why Protecting Your Mortgage is All About Protecting Your Income
The term mortgage protection is a misnomer. When you think about it, your main goal shouldn’t really be to protect your mortgage. It should be to safeguard your income so if God forbid, something happens to you, cash will be available to continue paying utilities, mortgage payments, provide food, clothing, medicine, etc for your loved ones. That’s why I think it’s more helpful to think of “protecting your mortgage” as “protecting your income”.
MORTGAGE PROTECTION = INCOME PROTECTION
How much of your income will your family need to continue to pay your mortgage and all the other living expenses that accrue? And how long will they need this money for? These are the two questions you should ask yourself when weighing mortgage insurance against life insurance.
Is Mortgage Life Insurance Mandatory in Canada?
Did you know by law, mortgage brokers in Ontario have to include a mortgage life insurance application with your documents? They can’t make you buy it but they do have to get you to sign a waiver if you refuse the coverage. It’s part of their compliance protocol and if you don’t fill out that form, guess what? They don’t get paid.
Because of this technicality, many homebuyers think it’s mandatory to purchase mortgage life insurance. The thing is you’re so busy scrambling to get everything together for closing, it’s an afterthought. So no, you’re not required by law to purchase mortgage life insurance from a bank. However, if you’re asking me, do you need life insurance for a mortgage? I’d say unequivocally, yes! And the best place to start is by talking to an independent life insurance broker like Policy Architects.
“Mortgage life insurance is an optional service offered by a third party, in this case, an insurance company. When a Canadian bank offers you an optional service, it must inform you about any charges that will apply. You must also be given the option to opt out of—or cancel—the service.” Government of Canada
Mortgage Insurance vs. Life Insurance
So if you’re confused, you’re not alone. Most people (major banks included!) use the words mortgage insurance when they’re actually talking about mortgage life insurance. Not to mention, many of us believe that purchasing mortgage life insurance is mandatory. Well, I’m here to set the record straight and dispell some of these myths.
Did you know that you can use personal life insurance to protect your mortgage?
A personal term life insurance policy is not tied to your mortgage or your lender. It’s tied to you and that’s a good thing. A personal life insurance policy follows you around like a trusted companion through all of life’s trials and tribulations including, buying/ selling a home, mortgages, renewals and refinances. As long as you’re paying your premium (which is guaranteed not-to-increase over the length of your term), it’s waiting to come alive to do its job when and if necessary. Personal life insurance is simply the best, most flexible and cost-effective way to protect your loved ones from financial devastation.
6 reasons to tick the “decline” box on Your Manulife, RBC or TD mortgage insurance...
...and take out a personal life insurance policy instead
The bank owns your policy & is the beneficiary NOT your loved ones!
That’s non-negotiable. This means, if you die, your spouse can’t use the proceeds of the mortgage life insurance to cover any needs other than the mortgage itself. So let’s say you’re the main breadwinner in the family and you have joint mortgage life insurance with both you and your spouse are listed on the policy. If something happens to you, the insurance pays off the balance of your mortgage which sounds good. But what about the spouse you’ve left behind? Even though the mortgage is paid off, there are other expenses to keep up with including food, clothing, utilities, car insurance, schooling, medicine, entertainment, etc. Is your spouse working? Will he or she have the resources to keep up with all of this and at a time when they’re feeling emotionally devastated? Just because your mortgage is paid off, doesn’t mean it’s smooth sailing for those left behind.
If you have a personal life insurance policy the beneficiary decides how and when the money is spent. Besides, in this low-interest climate, many financial advisors would argue paying off your entire mortgage immediately with a lump sum from life insurance proceeds may NOT be a financially savvy move.
Mortgage life insurance is NOT portable & increases the risk for future application denials!
Every time you switch banks, you have to reapply for your mortgage life insurance and the rate goes up. If you’re like some people, that’s every mortgage renewal! Not to mention, the bank has a new opportunity to deny the coverage if you’ve become uninsurable since your last mortgage application. Not likely, but it does happen. Can you imagine? Renewing your mortgage and all of a sudden you have no insurance. A personal life insurance policy is portable and follows you through all your renewals and refinances. Not to mention, when your mortgage is finally paid off, you still have the life insurance if you want to keep it.
Mortgage life insurance doesn't have guaranteed insurability options
Almost all term life insurance policies allow you to convert or exchange your term coverage for a permanent policy without providing medical evidence. This is crucial if you become uninsurable – it’s your only way of getting insurance moving forward. Mortgage life insurance from a bank DOES NOT have this feature.
Mortgage life insurance has a higher potential for claim denials
Mortgage life insurance underwriting doesn’t happen until AFTER a claim is made therefore the coverage is NOT guaranteed. Why is “post-claim underwriting” problematic? Often, people don’t read or answer the medical questions on the application properly. They’re in such a hurry to get everything wrapped up for closing, they get sloppy. Not to mention, the question’s are unclear and confusing. This opens the door to more potential claim denials as anything misrepresented or inaccurate on an application is grounds to not pay out the death benefit.
Erica Johnson (Host): “I think most people assume that once you’ve filled out this health questionairre, if they [the insurance comany] acccept your application and start taking your premiums, they have qualified.”
Jim Bullock (Insurance Expert): “Yes, I know they do and they’re wrong, all they’ve qualified to do is pay premiums. After they die there is a test to see if they actually have insurance.” (Jim Bullock) In Denial, CBC Marketplace
Underwriting Works Well For You In the Long Run but There Are Other Options
With personal life insurance, the carriers do all the underwriting up front. Yes, it can take some time…answering all the questions and completing a life insurance medical. However, once you’re approved, your insurance rates are locked in for the length of your term which could easily be 20 or 30 years. As long as you’re paying your premiums, your insurance is guaranteed and cannot be cancelled or modified in any way, no matter what. And when it comes to traditional underwriting, most major carriers in Canada pay out close to 99% of life claims they receive.
If you have an aversion to blood tests or you’re worried that you may be higher risk, no problem. Simplified-Issue coverage otherwise known as no medical life insurance is a good option in this situation. Depending on your age, you may be eligible for a 25-year term policy with Canada Protection Plan and coverage up to $500,000. In case you’re wondering, this product also comes with a conversion option to permanent insurance guaranteeing your insurability into the future.
A Mortgage life insurance policy is MORE EXPENSIVE than a personal life insurance policy
How much more expensive is mortgage insurance vs life insurance?
Let’s find out…I hope you’re sitting down.
Cameron (46 years old) and Stephanie (41 years old) just put a down payment on their 2nd home and are taking out a $500,000 mortgage at TD bank. If they take the TD mortgage insurance offered to them, they’ll pay $284.31 per month for joint coverage.
…But they could do better. For context, I’m going to give you the monthly rates for two other banks that offer mortgage insurance and compare them side by side to 3 life insurance companies that offer 10, 20 and 25-year terms to give you a better idea of what’s out there.
Cost of Mortgage Life Insurance
46 Year Old Male & 41 Year Old Female (There are no classes, just one pool of applicants)
$500,000 of Joint Mortgage life insurance coverage through TD, RBC and Manulife will cost:
5 Year Term
TD Mortgage Insurance
5 Year Term
RBC Mortgage Insurance
5 Year Term
Manulife Mortgage Insurance
Cost of Personal Life Insurance
46 Year Old Male & 41 Year Old Female (Non-Smokers, Standard Health Class)
Combined Individual $500,000 Term insurance policies through Empire Life, Equitable Life and Assumption Life:
10 Year Term
Empire Life
20 Year Term
Equitable Life of Canada
25 Year Term
Assumption Life
Ouch! Bank Driven Mortgage Life Insurance is EXPENSIVE
So as you can see Cameron and Stephanie are paying a lot more for their bank generated mortgage life insurance. I’m going to get into the 5-year renewal in more detail below – BUT just glancing at these numbers it’s pretty darned clear they’re gonna spend a lot more cash for the same face value. In fact, as you can see if they choose the wrong lender, even the bank mortgage insurance rates fluctuate radically.
It looks like TD and Manulife are similar in cost but if Cameron and Stephanie go with RBC mortgage insurance, they’ll spend 30% more per month. Over a 5 year fixed term, that’s $5400 more than TD or Manulife mortgage insurance. As you can see these numbers are going to snowball over time.
Personal Life Insurance Is Looking PRETTY SWEET
Let’s take the cheapest bank insurance option (Manulife) and compare it to the most expensive term option (Assumption). Manulife mortgage insurance will cost Cam and Stephanie $273 per month. If they opt for individual 25-year term policies with Assumption Life, the combined cost will be $183.60 per month ($125.55 for him + $61.65 for her). That’s $89.40 less per month for a savings of 33%! That’s a huge difference. Over 5 years, the cheapest bank option, Manulife mortgage insurance, will cost them $16,380 whereas individual 25 year term policies with Assumption will set them back $11,016. That’s a difference of $5,364 and in just a 5 year period!
Remember, their term coverage through Assumption Life is guaranteed for 25 years. This means their monthly cost will never go up and their coverage won’t decrease over the length of the term. Note: If you switch lenders over the term of your mortgage you’ll have to start over again when it comes to mortgage life insurance too. I will explain this in greater detail below.
5 Year Explanation
Remember, even though most mortgages in Canada are amortized over 25 years, the standard mortgage is a 5-year fixed. This means it’s not unusual to take out 5 separate mortgages over the life of paying off your home. How likely is it that you’ll stay with the same financial institution for 25 years, the duration of your amortization? Do you see what I’m getting at?
Like most people, Cam and Steph have a 5-year fixed mortgage which means their mortgage life insurance cost will remain level for 5 years. If they switch financial institutions when they renew their mortgage 5 years from now or do any refinancing, their current mortgage insurance coverage will end. If they choose to “tick” the box for new coverage, their rates will increase. Why will their mortgage insurance costs go up? Because Cam and Stephanie will be 5 years older and as such, they’ll pay the rates associated with a person 5 years older. Can you see how this could add up over 5 mortgage renewals when you’re switching banks and/or refinancing?
It’s interesting to notice in this scenario that even though your mortgage balance will be decreasing over time, your mortgage life insurance cost will be increasing. How does that work? So let’s take a gander how this would pan out over a period of 25 years right now.
So you can see there’s quite a substantial difference in price between a mortgage life insurance policy from the bank and a term life insurance policy from an independent broker.
Save 55% - 87% With Personal Life Insurance Over 25 Years!
The cost of housing isn’t cheap in Canada, especially If you live in the greater Toronto area (GTA) or Vancouver. It’s true some places are more affordable than others, but a hefty mortgage is not out of the question for a lot of us. For example, if you live in Toronto a semi in a good area can cost you close to $1,000,000. Which means that a $500K mortgage is not out of the question. Obviously, a mortgage that substantial isn’t going to be amortized over 5 years. So I’m taking some of the guesswork out of things for you and we’re going to review what it looks like over a 25 year period.
Mortgage Insurance vs Life Insurance Level Cost Over 25 Years
For the purposes of this example I'm going to use Cameron and Stephanie again. They have a $500,000, 5-year fixed mortgage @ 3.25%, amortized over 25 years. To keep things simple, every 5 years when they renew, their mortgage rate remains the same as does the cost of their mortgage life insurance:
Mortgage Life Insurance
5 X 5 Year Term
TD Mortgage Insurance
Personal Life Insurance
25 Year Term
Assumption Life
Wow! Can you believe it!? Over 25 years, Cameron and Stephanie will pay a whopping 55% more for TD mortgage insurance than they will for two individual term policies from Assumption Life!
This sounds hard to believe so let’s double check the numbers…
…The chart below starts with Camer and Stephanie getting a $500,000 mortgage @ 3.25% fixed 5 years and renewing it every 5 years at the same rate. Notice the declining mortgage balance and coverage. Likewise, note the personal life insurance cost and coverage remains level for 25 years. Notice in green the “difference” they’re paying over each 5-year term of the mortgage and then the total amount.
Over 25 years, Cam & Stephanie will pay $30,213 MORE with mortgage life insurance than they will with individual term 25 policies from Assumption Life (level $500k coverage for 25 years).
*Figures in table above based on $500,000 mortgage, 5-year-fixed @ 3.25%, amortized over 25 years. Mortgage life insurance quotes based on TD mortgage insurance rates. Personal life insurance quotes based on Assumption Life 25 year term rates. April 2019
Realistically People Pursue Lower Interest Rates
But Hold on! This example is based on Stephanie and Cameron receiving the same mortgage life insurance rate over a 25 year period with TD. Is that realistic? What if like many consumers, they switch banks every 5 years when they renew their mortgage? What if they decide to do a little refinancing because they want to do some home renovations?
Remember, mortgage life insurance is NOT portable. Your coverage ends when your insured mortgage is refinanced or transferred to another financial institution. To cover all our bases, let's do one more quick example. How does the cost of personal life insurance compare to mortgage life insurance when you have to reapply every 5 years because you're moving your mortgage to a different bank for a better rate?
Mortgage Insurance vs Life Insurance - Changing Banks Every 5 Years
Remember, we're comparing the cost of two individual life insurance policies to joint mortgage life insurance policies over a 25 year period. Cameron and Stephanie have a $500,000, 5-year fixed mortgage @ 3.25%, amortized over 25 years. In this example, to keep things simple, we'll keep their mortgage rate static but have Cameron and Stephanie switch financial institutions every 5 years. That means their mortgage life insurance will have to be replaced every renewal. Let's check out the damage:
Mortgage Life Insurance
5 X 5 Year Term
TD, RBC & Manulife Mortgage Insurance
Personal Life Insurance
25 Year Term
Assumption Life
Again, the difference in price between mortgage life insurance from the bank and personal term life insurance is massive! Over 25 years, Cameron and Stephanie pay a whopping 87% more for mortgage life insurance than they do for two individual 25-year term policies from Assumption Life! That's a savings of $47,960!
Let’s double check the math…
…The chart below illustrates Cam and Stephanie’s $500,000 mortgage renewing every 5 years with a different bank. Notice the declining mortgage balance and coverage while the cost of their mortgage life insurance rises and then declines. Again, note the personal life insurance cost and coverage remain the same for 25 years. Notice in green the “difference” they’re paying over each 5-year term of the mortgage and then the total amount. That’s not a typo…over 25 years, Cam & Steph will pay $47,969 MORE with a combination of TD, RBC and Manulife mortgage insurance than they will with individual term 25 policies from Assumption Life (level $500k coverage for 25 years)!
*Figures in table above based on $500,000 mortgage, 5-year-fixed @ 3.25%, amortized over 25 years. Mortgage life insurance quotes based on TD, RBC and Manulife mortgage insurance rates. Personal life insurance quotes based on Assumption Life 25 year term rates. April 2019
The Numbers Speak for Themselves - Unbelievable!
So you can see, in each of these examples the cost of mortgage insurance vs life insurance is unreasonably high: 55% - 87% MORE! What would you do with a savings of $20,000 - $40,000 over 25 years? Would you pay down your mortgage principal...or sock the cash away in an investment account? Not convinced? There's still one more reason to check the "decline" box.
Joint mortgage life insurance doesn't pay out a double death benefit
Don't let 'em fool ya: Joint TD Mortgage Insurance = One Death Benefit
Individual Assumption Term Insurance Policies = Two Death Benefits
Last but not least, as if the cost differential isn’t enough to persuade you, mortgage life insurance only pays out one death benefit.
If either Cameron or Stephanie happens to pass away prematurely, the TD mortgage insurance – assuming it pays out – will pay off the outstanding mortgage balance one time and then the coverage will terminate. The surviving spouse will have NO life insurance remaining if they need it for other liabilities. So in effect, you pay all that extra cash for joint mortgage coverage from the bank but it only pays out once.
With individual life insurance policies, if Cameron and Stephanie were to pass away at the same time, for example in a car accident, the insurance company will pay out two death benefits: one to Cameron’s beneficiaries and the other to Stephanie’s. That’s a total benefit of $1 million for Cam and Steph’s loved ones vs $500,000 (or whatever the remaining mortgage balance is) from the mortgage life insurance they purchased from the bank. Which coverage would you choose?
So Is Mortgage Life Insurance Worth It?
Let's review Mortgage Life Insurance...
You're NOT the owner of your policy, the bank is.
Your loved ones are NOT the beneficiaries of your mortgage life insurance policy, the bank is.
Mortgage life insurance is NOT portable making the risk of future application denials higher.
A Mortgage life insurance policy DOES NOT have the guaranteed insurability options that 99% of term life insurance policies do.
The "post-claim underwriting" of mortgage life insurance policy can result in more claim denials.
By every metric mortgage life insurance is MORE EXPENSIVE than term life insurance.
A Joint mortgage life insurance policy only pays out one death benefit.
Let's review Personal Life Insurance...
YOU own the policy and YOU decide who the beneficiaries are. Your loved ones determine how and when the tax-free proceeds are spent.
Your personal term life insurance policy IS totally portable and follows you through mortgage renewals and refinances at different financial institutions. When your mortgage is paid off, you have the option of keeping your term insurance in force if you still need it.
The majority of term life insurance policies have guaranteed insurability features including the option to exchange or convert to permanent insurance. This secures your long term insurability well into the future should you become uninsurable.
The underwriting for term life insurance is done at the beginning of the process "pre-claim". You answer a series of in-depth health questions and complete a medical check up. This is why traditional underwritten insurance has a very high percentage of life claims paid out.
As you can see from the example we did in #5, Personal term life insurance can be up to 50% cheaper than mortgage life insurance from a bank.
With individual life insurance policies, if both insureds die simultaneously, two death benefits are paid out. Not so with bank mortgage life insurance - only one death benefit is paid out.
Mortgage Insurance Vs Life Insurance - Final Thoughts
What more is there to say? It seems pretty clear to me, mortgage life insurance is an inferior product when compared to personal life insurance.
I mean how do you create an insurance product you can charge consumers more money for over the long term while simultaneously lowering the amount of protection? Well, the banks have figured it out…it’s called mortgage insurance. Not only does the coverage decrease over time but if you pay extra for double protection, only one benefit gets paid out. You gotta hand it to ’em, it’s pure genius.
So if you’re a homebuyer who checked the “accept” box and has let’s say, Manulife mortgage insurance, don’t worry, your heart is definitely in the right place. You should be acknowledged for doing your best to protect your family and home should something ever happen to you.
However, you should be aware that there are serious loopholes that go along with purchasing mortgage life insurance through the bank. if you want to be absolutely sure your loved ones have the highest level of guaranteed protection, a personal life insurance policy is hands down the best way to go.
I can say that with complete confidence.
Not all insurance is created equal!
If the expense isn’t enough to deter you then you need to look at all the other stand out reasons to buy a personal life insurance policy. First and foremost term life insurance is portable not to mention the fact that it’s guaranteed to remain level for 10, 20 or 30-year terms, depending on what you choose.
…and if you are looking for control over the life insurance benefits, term insurance can’t be beaten. Your beneficiary is in complete control of the funds, not to mention the fact that underwriting occurs PRIOR to your policy being put into force. So you can rest easy knowing your beneficiaries claim will be honored if the application was done properly.
All of this and you’ll also be given the option to convert your policy to permanent coverage without a medical exam. Hmmmmm I think the facts speak for themselves. So why not give the agents at Policy Architects a call today? We can help you go through all your options to find the right policy for you and your family today.