Is mortgage insurance worth your money?
Let’s find out Today!
Hey guys, It’s Thomas here!
No matter if you are looking to buy a place soon,
or you are going to renew your mortgage
some time in the future,
at some point
you will be meeting with the mortgage specialist
to go over the paper work and
the mortgage specialist there will always jump in
and say something like this:
‘’Congrats on getting your new place!
This is probably one of the biggest investments in your life,
and large investments are always worth protecting!
Imagine something unexpected happened to you,
and you can no longer work to pay for the mortgage,
what’s your family going to do?”
Then they start pulling out an application.
“But don’t you worry,
we have something called the Mortgage Insurance,
it will take care of the mortgage for you
in case you pass away.
And All you have to do is SIGN right here!”
He would then go on to ask you a few questions,
and next thing you know the payment is already embedded
into your mortgage payment
and you won’t even notice!
Sounds familiar right?
Have you ever wondered if this is too good to be true?
So in this video,
I will go over all the stuff
you need to know to see
if mortgage insurance is really that great?
and also how it compares to a traditional life insurance.
let’s dive in
First thing’s first.
The mortgage insurance I am referring to here,
is not the mortgage insurance from
the Canada Mortgage and Housing Corp (CMHC)
when your down payment is less than
20 per cent of the value of your home
This mortgage protection insurance
I am talking about is provided by the bank,
and in case you pass away,
they will take care of the mortgage for you.
But is that really the case?
Here is what I am going to do:
I want to compare a mortgage insurance
and a term insurance under the same company.
Then I want to compare them in 4 different areas:
eligibility, coverage, price and flexibility.
In the red corner,
we have RBC mortgage insurance from RBC bank,
I went to their website and downloaded their contract.
In the other corner,
we have a traditional life insurance from RBC insurance.
I also downloaded their sample policy online.
First, let’s take a look at the eligibility as in
who can apply for the mortgage insurance
and when the coverage ends.
For the mortgage insurance, here it says,
you can only apply when you are
between 18 years old and 66 years old.
In addition,
you can only apply for either the life and critical illness,
or the life and disability, but not both.
It’s worth pointing out that in a traditional life insurance
it does not have this kind of restriction.
Next, if we take a look at when the coverage ends,
there are a lot of conditions that will end the coverage early.
And I highlighted some of the trickier ones such as:
the coverage will end on the date
the principal balance of your mortgage increases;
on the last day of the month in which you turn 70 years old;
and on the date,
you are no longer the borrower,
co-borrower or guarantor of the mortgage.
With these strict conditions,
Your mortgage insurance might fail to paid
if you want to change in the mortgage amount,
you cannot transfer your ownership,
even if it’s to your children.
What’s more, with inflation and spending habits,
There are tons of family
who still paying on their mortgage over the age of 70
On the other hand,
most of the traditional term insurance cover you until age 80 or 85,
or allow you to convert it into a permanent life insurance.
It’s easy to see why a traditional life insurance
provides you far more flexibility.
in terms of the coverage amount,
as you can see here,
the maximum mortgage amount
that you can cover is $750,000.
Imagine if you live in cities like Vancouver or Toronto,
where the median detached home prices
are well over a million,
your mortgage amount could easily
exceed the maximum coverage amount.
When you compared this to a traditional life insurance,
it has no limit on the coverage amount
as long as you can justify it.
Now let’s go back to the definition
for a mortgage insurance,
in exchange for a monthly premium,
the bank will cover the mortgage balance
when the policyholder passes away.
This might seem obvious,
but your mortgage balance should
theoretically decrease over time,
That means that your mortgage insurance coverage
is also decreasing at the same time!
While you are still paying the same payment.
With life insurance,
the death benefit of the payout remains
the same throughout your term.
Also, this is very interesting,
as you can see here
there is something called pro-rated coverage.
What this means is if my mortgage balance
is more than $750,000 initially,
the bank will not give the full amount
even if my mortgage balance drops below $750,000.
For example, say when I got my place,
the mortgage balance was 1 million.
At the time that I pass away,
the balance was already down to $500,000.
If I signed up for the mortgage insurance,
I thought it would take care of the entire amount
since it’s under $750,000,
BUT NOOOOO!
With the prorate in this policy:
$750,000 / $1,000,000 X $500,000 =
They will only give me $375,000
And now my family has to figure out
the rest of the mortgage balance
No.3 let’s talk about the price.
For the mortgage insurance,
since it’s actually a group insurance,
they only have what’s called an age band.
Whereas for the regular life insurance,
the cost of insurance is based on age, smoking habits,
gender and other health related questions.
So say you are a 30 year old
getting a $500,000 mortgage,
for the RBC term life insurance,
it’ll be around $45/month,
$100/month if you are a smoker.
For the mortgage insurance,
it will also be $45/month
regardless if you smoke or not;
and if you want to cover two people’s life,
then the mortgage insurance seems to be a better deal.
However, this is where you need to pay attention.
Previously we said, every 5 years,
your mortgage will be renewed.
Normally you would switch to another lender for better rate,
or you might refinance your house again.
Either way,
since there is a change on the carrier or the mortgage balance,
you have to apply for a new mortgage insurance,
only this time, you are 5 years older,
meaning you would need to pay a higher premium.
And Remember, this will happen every 5 years.
Your insurance cost increases but to get a coverage
that is dropping over the time of your life span.
With term life insurance though,
the price will be locked in for the length of the term
that you signed up.
So you will be paying the same rate for the next 20 – 30 years.
Lastly, let’s compare the flexibility,
such as ownership, portability, policy renewal,
and what you can do with the money.
If you have a mortgage life insurance,
it’s important to point out that
both the owner and the beneficiary
of the insurance are the mortgage lender.
In other words,
the claim money will go to the bank regardless.
For a traditional life insurance,
however, the money will be given to your family.
Your family can choose to pay off the mortgage,
or use it on something different.
This would give them a much higher flexibility.
Also, for the traditional life insurance,
it’s always portable.
This means even if you switch
to a different mortgage lender,
your life insurance is not affected.
It is not unusual that
you might have second thoughts on your place.
Sometimes you might want to sell it,
or you might want to re-finance it.
The mortgage insurance will be affected
every time you make a change to your mortgage.
Bottom Line for all of this,
a mortgage insurance might be convenient to get,
cause all you have to do is to answer a few questions,
sign on the dotted line and that’s it.
And some times the bank might even say
this is mandatory to get one.
The downside,
even though it might not be so obvious right away,
is that there is a lot of inconvenience
in the future for this brief convenience.
I rarely say never ever buy a certain financial product,
but the mortgage protection insurance
is definitely one of the things that I don’t recommend.
Not only the price isn’t the greatest,
there’s a lot of dispute on the eligibility,
and it’s definitely not as flexible
compared to a regular term life insurance.
So yeah if you are looking to protect against the debt,
go for a term life insurance.
They are inexpensive, the rate will stay the same,
and it provides much more flexibility.
Did you learn something new in this video?
As always,
let me know what are your thoughts down below!
And if you want to know how money works
and how you can work with money,
then I will see you in the next video!
Bye Guys!