Insurance: Covering Your Assets
May 2008 - Tammy Buss

Buying a house or renewing a mortgage? If so, you’ll need to make a decision about mortgage insurance or term life insurance. The bank will offer it to you, but should you take it?

In order to make a decision you should know what the differences are between the two. They both have advantages and disadvantages, that we’ll look at to make it easier for you to make your decision.

Mortgage insurance is life insurance that’s meant to pay off your mortgage in case of death while there’s a balance outstanding on the mortgage. The insurance decreases; as the mortgage balance decreases, however, the premium remains level for the term of the mortgage. This type of insurance is usually purchased through the financial institution that holds the mortgage.

Term life insurance is usually purchased through an insurance broker. The purpose of it is to pay off the mortgage. The coverage amount and premium remain level for the term of the policy (usually 10 years).


Advantages of mortgage insurance:

• Quick and easy: Answer a couple of medical questions and the coverage can be approved quickly; no medical exam is required, however it’s possible to be declined.
• Convenient: Insurance premiums are included with your mortgage payment.
  
• Easy to budget: Premium rates don’t change during the term of your existing mortgage as long as your balance doesn’t increase.

Disadvantages:

• Lack of control: The lender owns the policy and you have no control over it.
  
• Lender is the beneficiary: The death benefit is automatically used to pay off the mortgage, regardless of the wishes of your family.
• Benefit decreases: As your mortgage becomes less, the insurance coverage decreases.
  
• May be difficult to change lenders: If you wish to move your mortgage to a different provider you won’t be able to take the mortgage insurance protection with you.
  
• Premiums can increase: The lender can decide to raise the premiums because they own the policy.
  
• Illness could mean loss of coverage: If you become terminally ill and can’t afford your mortgage payments, you’ll lose your insurance coverage and no death benefit will be paid.
• One death benefit paid: In the event of a common disaster, only the mortgage balance outstanding will be paid.
  Advantages of term insurance:
• Greater control: You own the policy and you can appoint the beneficiary.
• Ability to change beneficiary: You can change the beneficiary anytime.
• Portable: If you want to change your mortgage provider, the insurance protection is separate from the lender.
• Conversion options: You can select a policy that has a conversion option that will grant you the option of changing the coverage to permanent protection in the future, regardless of health.
• Versatile coverage level: You can purchase any amount of coverage and add or decrease coverage at any time.
• Premium guarantee: You can select a policy that has guaranteed premiums.
  
• Additional protection with illness: If you become terminally ill and can’t pay your mortgage payments but can still make the insurance payments, your policy will pay the death benefit.
• Benefit remains level: Death benefit doesn’t decrease as mortgage decreases unless you request the coverage to be decreased.
• Possibility of two death benefits paid: If you cover both you and your spouse, both death benefits will be paid in the event of a common disaster.
  Disadvantages:
  
• Medically underwritten: You’ll have to go through medical underwriting and be approved or declined.
  
• Premiums increase as you get older: Depending on the type of policy you select. For instance, for a 10-year term, the premiums will increase at certain predetermined intervals, and this will be outlined in the contract.
  

I’ve found that over the years, the rates for personally-owned term insurance are generally lower than the bank rates. So pull out your mortgage documents: even if you’re not renewing: and call your broker for a quote to see how things compare. But before that, visit the CBC website (www.cbc.ca/news/story/2006/09/21/life-insurance.html and www.cbc.ca/marketplace/in_denial/) for additional helpful information.