Putting Mortgage Insurance In The Penalty Box


From what I gathered around the web, this type of product apparently benefits the lenders more than you.

A mortgage insurance is a group insurance policy offered by banks and lending institutions at the time you take out a mortgage. It’s similar to a regular term-life insurance, but with 2 exceptions: the payout equals your mortgage balance, and the lender is the named beneficiary.

What’s wrong?

  • Since the payout equals the mortgage balance, your coverage declines as you pay down your mortgage. In other words, you’re enriching the lender by paying the same hefty monthly insurance premium while they’re getting away with less coverage.
  • Lenders love it when you borrow their money and insure it with a life policy. If you die, their money is protected while your family gets no lump sum payment. Family should come first because they’re the ones facing financial hardship. Someone has to cover your funeral expense, probate fee and inheritance taxes. Unless you live in Vancouver, a mortgage is only 1/3 of your recurring expenses. There’s still a bigger hole to fill in your cash-flow.
  • Mortgage insurance lasts only as long as the mortgage term, which is typically 5 years. Every time you want to switch lenders for lower interest rates, you’ll have to re-apply and pay the application fee again. The worst case scenario is you might not qualify for a new insurance policy, especially if you develop new medical conditions.

    • What’s the alternative?

    Term insurance. The advantages are overwhelming. Both your premium and coverage are fixed. Your beneficiaries have complete control over how to spend the payout. You can lock in a 30 year term. Last but not least, term policies are about 33% cheaper.

    You can get term-life insurance quotes from the following brokers:

    Research: Perils of a mortgage life policy by Ellen Roseman

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    Reader Comments

    Comment Number:
    1
    Written by:
    MillionDollarJourney.com
    Posted on:
    June 12, 2007 at 9:55 am

    FJ, what are your thoughts on “Joint-First to Die Policies”? Is it better for a couple to go with that, or go with 2 individual term policies?

    Comment Number:
    2
    Written by:
    FourPillars
    Posted on:
    June 12, 2007 at 12:02 pm

    I remember looking at mortgage insurance with TD and the fee was based on the current amount of the mortgage not the initial mortgage. I’m sure it was still a ripoff but at least it got cheaper as you paid the balance down.

    Mike

    p.s. - any chance you could add a ‘comments’ feed to your blog??

    Comment Number:
    3
    Written by:
    Financial Jungle Guy
    Posted on:
    June 12, 2007 at 4:31 pm

    Hi MDJ,

    I didn’t have an opinion on “Joint-First to Die Policies” (JFTD) until 10 minutes ago. :D Being the skeptical type, my first instinct is “this must be a rip off,” but after working out some scenarios, I think it’s not so bad.

    Since JFTD is 15% cheaper than 2 single policies, you can top it up to 100% to increase the coverage for the same premium as 2 single policies. Sure, JFTD terminates after the first claim, but the second person can write down in his/her will to transfer both the claim AND net worth over to the legal guardian of the child. If the (inflated) claim is enough for the survivor, surely it’s enough for the legal guardian especially if you include your net worth.

    FourPillars – I didn’t know about TD’s offering. Also, I’ll look into adding the comments feed. Thanks for the tips.

    FJ

    Comment Number:
    4
    Written by:
    MillionDollarJourney.com
    Posted on:
    June 12, 2007 at 6:12 pm

    When I got my first mortgage, I got the bank mortgage insurance insurance (CIBC) b/c it was dirt cheap ($12/mo) and I knew that I’d be getting a new mortgage within the 5 years (very little pay down).

    In my opinion about insurance, it’s all about making sure that your dependents are covered in the case that one spouse passes and some cash flow dries up. So JFTD might be a viable solution for most couples. The exception being is that if you have a divorce, the beneficiary is still the spouse. So perhaps 2 separate polices does have it’s merits.

    Comment Number:
    5
    Written by:
    Financial Jungle Guy
    Posted on:
    June 12, 2007 at 6:24 pm

    Since a life policy is to protect the dependants instead than the marriage, I’d consider leaving the ex-spouse as the named beneficiary, if I intend to contribute my share of the child support.

    Comment Number:
    6
    Written by:
    The Financial Blogger
    Posted on:
    June 12, 2007 at 11:32 pm

    I personally think that any kind of life insurance is better off than mortgage life policy! I canceled all my life insurances related to my debt to contract a huge JFTD that will meet all my spouse or my personal need if anything happens.

    What also I like about it, is that if both of you and yous spouse die within 45 days, your beneficiary will get twice the amount of the policy.

    That surely makes daddy and mommy sleep at night!
    Cheers,
    FB.

    Comment Number:
    7
    Written by:
    Carin
    Posted on:
    November 19, 2007 at 8:06 pm

    Term life insurance allows you as the policy holder to name your beneficiary; the bank names themselves. Should something happen, this gives your beneficiary complete control over that money. The bank will simply pay themselves. Bank mortgage insurance has the best interests of the bank; term life has yours.