Your home is one of the most expensive assets you’ll invest in. If something were to happen to you, it’s important to protect your investment and retain ownership of your home. The most common way to protect your home is by purchasing “over the counter” mortgage insurance through a lending or financial institution—usually the very one you’ve negotiated your mortgage with. While that may seem like a good idea on paper, it really isn’t. Mortgage insurance is designed to protect the bank from financial loss and can leave you—the homeowner—at risk.

Mortgage Insurance vs. Life Insurance

The are some key differences in purchasing mortgage insurance from a financial or lender institution compared to life insurance policies acquired through a broker on behalf of an insurance company. Though mortgage insurance is a type of life insurance, instead of having a pre-set death benefit, the benefit declines as you pay off the amount outstanding on your mortgage. For example, if you have a $500,000 mortgage and you’ve paid off $350,000 of it, only the remaining $150,000 would be paid out upon death. With a life insurance policy, you receive the full death benefit covered by the premiums you pay.

If you can no longer make your mortgage payment due to terminal illness or because of a long-term disability, both mortgage and life insurance are generally eligible for additional riders to cover disability insurance and critical illness insurance. This extra rider coverage could help you pay off your mortgage under such circumstances. However, the best way to protect your mortgage is purchasing a combination of term, or permanent life insurance, along with disability and critical illness insurance through a licensed life insurance broker and here’s why.

Non-licensed Professionals vs. Licensed Insurance Professionals

With some exceptions, lending personnel offering “mortgage insurance” to consumers are often not licensed to give insurance advice or educate clients on insurance products. Their goal is to sell you coverage for your full mortgage amount, even if you don’t need it. Note, that if a lender requires you to buy their mortgage insurance, or an affiliate’s, as a condition to granting you a mortgage, this practice is known as “tied selling” and is illegal.

In comparison, a licensed life insurance broker or agent will conduct a needs analysis  based on your goals, affordability and life insurance coverage you already have—your benefits package at work and/ or individual/ personal life insurance—to ensure you have the right bundle of insurance products designed to protect your mortgage in any scenario.

If in question, ask the person making the recommendation if they are a licensed life insurance agent or broker. Another clue is on marketing literature that suggests speaking with your mortgage broker to apply for coverage.

Non-Guaranteed Coverage vs. Guaranteed Coverage

Do you know you’ll be covered when you or your loved ones need it the most? Paying mortgage insurance premiums to your bank doesn’t necessarily guarantee you coverage as CBC Marketplace discovered in this investigative report. This is perhaps the biggest misconception about mortgage insurance. Underwriting (risk assessment and qualification for coverage) of most mortgage insurance policies occurs only after you file a claim—in other words, when it is needed. This is known as post-claim underwriting insurance. It’s more affordable for the banks to do it this way.

On the contrary, underwriting of life insurance policies by a licensed broker are done at time of application. When a broker submits a policy application the underwriting is processed up front, so if there are any issues with eligibility, you will find out before the policy is approved. You’ll have peace of mind knowing the death benefit will go to your beneficiary and leave them the legacy you want them to have. And if you’re not eligible, you will have the opportunity to look at alternatives.

Expensive vs. Fair Premiums

Premiums for mortgage insurance are built on group plans and not individual health or medical status, so everyone pays the same rate. It’s important to note these policies are subject to health or medical questionnaires to determine eligibility. Also, as you pay down your mortgage, the payout from the policy shrinks but the cost of your premium doesn’t change, even though you have less coverage. In the end, mortgage insurance is more expensive for these reasons. When you qualify for a life insurance policy, the premium you pay is based on a risk assessment and your medical status. If you’re in good health, you’ll pay a lower premium.  Premiums also remain level as long as your policy is in force.

Policy Ownership: The Bank vs. You

When you purchase mortgage insurance through a bank, they own the policy outright, becoming the beneficiary by default. Your loved ones do not receive any funds, the bank pays out the mortgage directly. When you purchase insurance through a licensed life insurance professional, you own the policy outright. You have the authority to designate a beneficiary of your choosing. The beneficiary can use death benefit funds to cover whatever is needed—including the mortgage.

Life Insurance as Mortgage Protection

Term Insurance – Provides affordable coverage for a specific term of time, generally in 10-year or 20-year terms. The premiums paid during that term are set and won’t increase in cost. When the term expires the policy must be renewed and is subject to specific requirements, new terms and likely an increase in premiums as you age. However, the tax-free death benefit provided by term insurance allows for financial control and can be used in lieu of mortgage insurance to pay off your remaining mortgage.

Whole Life Insurance – Permanent life insurance that offers you protection for life with guaranteed level premiums and a tax-free death benefit because it is an asset. This builds up equity known as a cash value that you can leverage as an emergency cash reserve to cover expenses, or your mortgage, in times of crisis as a living benefit, not just as a death benefit.

Critical Illness Insurance – Pays you a tax-free, lump sum payment usually following a survival period of 30 days after diagnosis of a life-threatening illnesses or critical condition as defined by your insurance plan. You can use the funds to cover mortgage payments while you recover or for your other needs.

Disability Insurance – Replaces a portion of your earnings if an accident or illness causes you to become unable to work or earn an income after a waiting period has passed. Claim payments are made monthly and can be used towards mortgage payments.

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