Mortgage Blog
Getting you the mortgage you deserve
Big 5 Mortgage Insurance vs Traditional Life Insurance.
November 20, 2024 | Posted by: Christopher Chanakos
Mortgage Insurance vs. Traditional Life Insurance: What You Need to Know
As you near the completion of your mortgage process, you may be presented with the option of purchasing mortgage insurance. This coverage can include protection for disability, critical illness, and death. While the concept of mortgage insurance sounds appealing and many homebuyers sign up for it, it’s important to understand how it works and how it differs from traditional life insurance.
What is Mortgage Insurance?
Mortgage insurance offered by banks is designed to pay off your mortgage in the event of death, disability, or critical illness. The idea is simple: if something unexpected happens, your mortgage is paid off, providing peace of mind to you and your family.
As mortgage brokers, we earn a commission when clients opt for this coverage. However, it is essential to recognize that mortgage insurance works differently from traditional life insurance, particularly in how the policy is underwritten.
The Key Difference: Post-Claim Underwriting
One of the main distinctions between mortgage insurance and traditional life insurance is the underwriting process. Many of the big banks use post-claim underwriting for their mortgage insurance products. This means that your application is not reviewed until you file a claim, which could result in an unpleasant surprise.
If something were to happen, you might find that your application was not fully reviewed, or that you answered questions in a way that inadvertently disqualified you from coverage. The questions on the application are often general and vague, making it easy to provide answers that could later be deemed incorrect. Unfortunately, mortgage advisors are typically not licensed to provide detailed explanations about the specifics of these policies, leaving you with little clarity on what is and isn’t covered.
In the unfortunate event that your family needs to file a claim, they may not receive the intended benefit. In some cases, your premiums could be refunded, but this would still leave your family financially vulnerable when they need support the most.
Why Traditional Life Insurance is a Better Option
Traditional life insurance offers several advantages over mortgage insurance. Firstly, life insurance is more flexible and offers greater coverage options. Life insurance pays the full face amount of the policy to your beneficiary, regardless of the outstanding mortgage balance. This means that if you took out a $500,000 mortgage, but after eight years only owed $250,000, a traditional life insurance policy would pay out the full $500,000 to your beneficiary.
In contrast, mortgage insurance from the big banks only covers the remaining mortgage balance. So, if something happens, the insurer would pay off the remaining debt—if you qualify. This is a major limitation, as the benefit is tied specifically to your mortgage and lender.
Flexibility and Portability
Another significant advantage of traditional life insurance is that it is portable. If you decide to switch lenders or move to a new home, your life insurance policy remains in place. With mortgage insurance, however, the coverage is tied to your lender and your property. If you switch lenders or buy a new home, your coverage will not move with you, and you will need to apply for new coverage at an older age, which could result in higher premiums or difficulty qualifying for new insurance.
Conclusion
While mortgage insurance may seem like an easy solution, it’s important to understand the risks and limitations associated with this type of coverage. Traditional life insurance offers greater flexibility, better coverage, and more control over your financial security. Your mortgage broker can help you explore all your options and ensure that you choose the right insurance product for your needs.
For more insights, check out CBC Marketplace’s investigative report, “In Denial,” which explores the pitfalls of mortgage insurance offered by the big banks. Click here to view the report.