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Is Mortgage Insurance a Good Idea?

Many of the clients that I have met with in the past have talked to be about the good deal they got at the bank regarding mortgage insurance. Not only did they get approved for the mortgage with the bank, but for only a ‘little’ more payment (often included right away in the mortgage payment, so you don’t notice it), they were able to get mortgage insurance as well. Let’s go over a few reasons why mortgage insurance isn’t as good as it is made out to be.

  1. Mortgage insurance names the bank as the beneficiary.
    1. When you get private life insurance coverage, and you pass away, the beneficiaries you have named in your policy receive the death benefit tax free, not the bank.
    2. This means that the beneficiaries can use that money in any way that they see fit – to pay the mortgage off if they wish, or to use the money for other things as well.
  2. Mortgage insurance has declining coverage.
    1. Because you are paying off your mortgage with each payment made to the bank, this means that you actually have less coverage each and every month as well – even though your premium is remaining the same.
    2. If you purchase your own life insurance policy, the coverage remains in effect for the life of the policy. There is no decrease in the amount of coverage.
  3. Mortgage insurance renews every 5 years.
    1. Some banks not only require you to requalify for your mortgage every 5 years, but they also require you to requalify for your mortgage insurance. Therefore if your health has changed, you might not qualify for mortgage insurance the next time around.
    2. After 5 years, when you renew your mortgage insurance, most banks increase the premium for the mortgage insurance because you have gotten older. So not only could you have to qualify again, but you could have to pay more as well.
    3. The smallest time period that a life insurance policy is good for is 10 years (term 10 policy). This means that the policy premiums and coverage are good for 10 years. Also, if you desire to renew after 10 years, you can do so (at a higher premium), with no medical required – automatically approved – as almost every life insurance company now has renewable term policies. Other options that might make more sense are a term 15, 20, 25, or even a term 30.
  4. Mortgage insurance is more expensive. Getting a private life insurance plan through a life insurance broker is almost always less expensive than they bank – and substantially so. I have had clients save 30-40% on premiums when compared to what the bank was charging.

Two Things to Consider

  1. Some of you might have been declined for mortgage insurance because of your health and think that you cannot get coverage as a result. It has been my experience that I have almost always been able to find life insurance coverage for my clients even if there are health concerns. I have found affordable life insurance plans to cover mortgage costs many, many times for clients who have been declined by banks in the past. Getting coverage is not as difficult as you might think!
  2. With the different term options, many of my clients decide to stagger the amount of coverage they have. Let me give you an example. A couple has a $400,000 mortgage amortized over 20 years. They hope to pay off $150,000 over the next 10 years, so the amount of coverage for the mortgage will decline after 10 years. In this scenario, it might makes sense to get a $250,000 term 20 policy, with a $150,000 term 10 rider. Total coverage for the first 10 years would be $400,000; and after 10 years the coverage for the next 10 years would be $250,000 (the premiums would also decrease at that time).

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