Mortgage Informer

There’s an old saying that death cancels everything but truth. Nice sentiment, although it’s not quite right. Still owe a chunk on your mortgage when you die? Your partner, children or estate have to pay it off. That’s why mortgage life insurance is so popular.

Mortgage life insurance guarantees that your remaining mortgage will be paid off in the event of your untimely demise, but it doesn’t come cheap. It can add more than 10% to your current mortgage payment depending on the size of the mortgage and how old you are. That’s not an insignificant sum to get a little peace of mind, and critics point out that the amount paid declines along with your mortgage even though your rates stay the same.

But Gary Mauris, president of Dominion Lending Services, a national brokerage and leasing company based in Vancouver, believes such coverage is critically important. “The expense far outweighs the devastation most families experience with the untimely death of the primary income earner,” says Mauris. “Many families are forced to quickly move, relocate, downsize or solicit assistance from friends and family when a death occurs without proper coverage.”

Coverage is especially important for single parents, says Mauris, because it allows any children to remain in their existing home with the designated caregiver without anyone having to worry about paying the bank.

The question couples have to ask themselves is whether each spouse can carry the mortgage on their own – or long enough to either sell or make other arrangements — if the other one dies or is disabled. If they can’t, mortgage insurance or term life insurance may be a necessary expense.

While mortgage life insurance is often confused with default insurance, the two are quite different. Default insurance pays off the mortgage lender directly if the borrower defaults. Premiums currently range from 0.5% to 2.9%, depending on the size of your downpayment and coverage is usually mandatory if the downpayment is less than 20% of your home’s purchase price.

Mortgage insurance is more expensive, not mandatory and the borrower’s beneficiary or estate gets the money to pay the bank in the event of death or disability.

Premiums are based on age (must be over 18 but under 65) and the amount covered. For example, a 45-year-old with a $300,000 mortgage being paid off with $800 every two weeks would add $40.15 for life insurance and another $24 for full disability coverage to their payments, according to BMO’s mortgage life insurance calculator. That’s $64.15 or 8% more every two weeks — not an insignificant sum.

A 30-year-old with the same mortgage would add $32.96 or about 4% for the same coverage. Insuring a couple is more expensive, but less than double the coverage for a single person.

Mortgage insurance is often applied for at the same time as the mortgage, but it can be added after the fact. Many people just buy it from whoever is backing their mortgage, but consumers should shop around because there are plenty of companies that offer it. By comparison, default insurance is usually bought from either the Canada Mortgage Housing Corp. or a few private companies such as Genworth Financial Canada, AIG United Guaranty.

While most providers offer fairly similar coverage and costs, buying it at the same time as your mortgage from the same bank is simpler and faster, says Craig Mauchan, vice-president at BMO Insurance. As well, “coverage and insurability last for the life of the mortgage at the same premium rate as at application,” says Mauchan.

But consumers should also consider taking out enough term life insurance to cover their mortgages. The advantages of that strategy are that the amount paid out upon death does not decline over time, the plans can be customized to include living expenses and other debts and it may actually be cheaper.

According to insurance shopping service Kanetix, it is less expensive to get a term life insurance policy than the equivalent amount in mortgage life insurance and there is more flexibility for the benefactor to choose how to spend the money.

Either way, always read and understand the fine print. There are plenty of horror stories about people being denied payouts because insurers found a loophole or started rooting through medical history records to find pre-existing conditions or even mere tests that weren’t stated upfront. The last thing you want your beneficiaries to worry about is dealing with an uncooperative bank or insurer.

Related posts:

• Mortgage protection insurance program protects from accidental death – Affordable life insurance policy saves your home and pays off mortgage
• Taking Advantage of Declining Mortgage Rates
• Government Mortgage Refinance Plan – Save Money on Low 15 Year Fixed Rates
• Bad Credit Home Equity Loans – For Adverse Circumstances
• Mortgage Refinance – Does The Advantages Outweigh Disadvantages

Tags: Mortgage, mortgage insurance