Should I purchase my mortgage insurance coverage at the bank?

In this article, we will cover the following points:

1. What is Mortgage Life Insurance?
2. What is Personal Life Insurance?
3. Get a Quote for the Bank Mortgage Insurance
4. Purpose of Mortgage Insurance
5. Can Personal Life Insurance cover Mortgage?
6. Mortgage Life Insurance (death) versus Mortgage Loan Insurance (default)
7. Mortgage Insurance Versus Life Insurance
8. Table showing the differences

When most Canadians sign the paperwork for their mortgage, part of the mortgage-signing process requires your banker to ask you to consider signing the bank mortgage insurance to cover the mortgage balance in the event of death. The argument provided in favor is it is hassle-free and convenient to sign the application consenting to the bank insurance to fulfill this need.

What Is Mortgage Insurance?

You can be in a situation of buying a new home or renewing your existing mortgage. Your bank or lender might ask you to take the group mortgage insurance from the bank, which is convenient and easy to get. This insurance aims at protecting your mortgage in the event of death or illness suffered by the primary borrower.

What is Personal Life Insurance?

Mortgage insurance benefits cease once you pay off the mortgage. Consider a life insurance policy here. Personal Life insurance can cover a mortgage too. A life insurance policy can serve the same purpose as mortgage insurance and offer coverage for your mortgage balance in the event of death, along with additional benefits. It makes business and economic sense to cover your debts with personal life insurance.

First step: Get a Quote for mortgage insurance from the bank

You should get a quote for your mortgage insurance and contact your life insurance provider to find out if there are any better solutions for insuring your mortgage. You must follow this step regardless of whether it is a new mortgage or a renewal.

Purpose of mortgage insurance

To relieve the family when left with a large mortgage balance because of the death or illness. The mortgage insurance offered by your lender or bank is a group insurance to protect the mortgage in the event of death or illness. Banks primarily target first-time or new homeowners having less awareness about other options but are concerned about death or illness. That leaves the mortgage balance unpaid. It leaves your family with a large mortgage balance the bank needs to pay.

Can Personal Life Insurance Cover Mortgage?

Mortgage insurance is a group insurance, but life insurance is an individual insurance product. Mortgage insurance links to your mortgage, so many things may change as your mortgage reduces. Life insurance does not change with mortgage reduction. Life insurance covers your mortgage and provides money to the beneficiary in the event of death. Your beneficiary has the freedom to pay off the mortgage and use the money for other purposes.

Mortgage Life Insurance (death) versus mortgage loan insurance (default)

Both may sound similar, but you need to know the difference. While buying a house, if your down payment is less than 20%, the lender would sign you for mortgage loan insurance to protect the mortgage from default. However, mortgage life insurance differs from mortgage loan insurance. It only pays off or pays down the mortgage if the death or illness of the insured. While signing the papers, you must check which one the bank offers to you.

Mortgage Insurance Versus Life Insurance

There is a significant difference in terms of benefits offered by the two. We have explained the benefits below:

• Mortgage insurance covers only the mortgage balance at any point. Hence, the cover keeps decreasing as you pay the mortgage.

• Personal insurance coverage remains the same throughout the policy term because the insurer does not link it to your mortgage.

• When you pay off the home mortgage, the coverage ends. The personal coverage continues even after you pay off the mortgage. You enjoy the protection and the cover for many years if the policy continues.

• Mortgage insurance is easy and quick to arrange and needs a few health-related questions to answer. Buying life insurance typically takes longer as it delves deeper into your medical history. 

• Mortgage life insurance can be more expensive than personal life insurance, but make sure you get the quotes from both insurances and compare the cost vis-à-vis the benefits.

• Life insurance offers better flexibility and portability than mortgage insurance. If your situation or condition changes and you want to renew your mortgage with another provider, or if you want to buy or sell your primary residence, you need the same coverage during these processes. For mortgage insurance, the cover may not be the same through these life events. Life insurance coverage stays the same with you throughout these changes.

• The post-claim underwriting process is different between the two. For mortgage insurance, the insurer asks the insured a series of questions, and if you have answered them correctly, the bank approves the coverage on the spot. The insurance representative’s primary aim is to sell the insurance. The insurer investigates your medical history.

• The primary differentiator because the mortgage insurance is unfit for insurance is the property owner looks to ensure that it provided cover to the family in case of death or illness. It is where life insurance gets preferred.

• The coverage and the premium you pay are decided at the outset at the underwriting level and do not change, but in the mortgage, if there is any discrepancy found in answering the questions to the best ability, the bank may deny the coverage or the payout and your family face trouble settling the mortgage.

• Life insurance pays the face value, but the mortgage pays according to the mortgage balance at the time of claim.

• With Life Insurance, you choose the beneficiary and assign it to your family member. The beneficiary gets paid the face value of the insurance policy. With mortgage insurance, you are paying into the product, and the bank is the only beneficiary. Your family members will not benefit from the insurance proceeds.

For better insight and to help you choose the right product, we got the comparison handy for you in a tabular format.

	Bank Mortgage Insurance	Personal Life Insurance to cover your mortgage
Will Your Death Benefit Remain Level?	NO As you continue to pay, your mortgage decreases with the insurance coverage. You continue to pay the same premium, and your cover reduces. You end up paying more than you agreed per the $1,000 cost of coverage. The death benefit will pay only the balance of the mortgage upon death.	YES The death benefit of a personal plan remains level for as long as the insurance holds good. You may choose to decrease the coverage. The life insurance company will pay the death benefit in line with the face value of the insurance purchased.
Am I the Owner of the Policy?	NO The bank is the policy owner and will exercise total control over your coverage. The bank can cancel it if they deem any discrepancy.	YES You are the policy owner, and the coverage will cater to you. Only you may cancel it or change the policy.
Can I choose the Beneficiary of the Policy?	NO The bank does not give you any freedom to choose the beneficiary when purchasing the bank’s mortgage insurance. By default, the bank will remain the beneficiary throughout the policy.	YES You can choose to name the beneficiary of your life policy. Your survivor has the freedom not to pay off the mortgage as the beneficiary may choose to put money in more attractive investments than paying off the mortgage.
Will the Death Benefit pay for my spouse and me during a common disaster?	NO If a common disaster happens where both husband and wife get killed in an accident, the bank will pay only the mortgage balance as a claim benefit.	YES With personal insurance, if both lives are insured, the insurance company will pay a death benefit on both lives. If the husband and wife have coverage of $200,000 each for their mortgage, the beneficiary will get $400,000, which could be much higher than the mortgage balance at the bank.
Is the coverage portable?	NO If you want to transfer your mortgage to another financial institution, you must reapply for mortgage insurance at the new financial institution. You will purchase this purchased at your higher age at a higher premium. You need to be healthy enough to qualify for the coverage, or you may not get it or get it at a much higher cost.	YES Regardless of with whom you hold your mortgage, you will enjoy the continued same coverage as it stays with you. You do not need to re-qualify for coverage if you move the coverage insurability to another insurer. If you want to increase the cover, you need to establish that adequately.
When is the Underwriting done?	NO When using bank insurance, the bank will do the underwriting at the time of death. In this way, more problems than not can arise as the bank’s insurer will try to dispute the claim.	YES Using personal coverage, an insurance company will do the underwriting at the time of application. So in the event of a death, the insurance will pay for the claim. The company can contest in the first two years after application in the event of fraud or non-disclosure. After two years, the insurance company will pay for the claim promptly.
Can I get Preferred Rates available if I am in excellent health?	NO	YES Many companies offer preferred rates if you are in excellent health, and will get you a lower premium than a standard rate.
Is the insurance plan convertible?	NO	If required, you can convert your policy to a permanent insurance plan if the term policy has this feature (almost all do).
Is the premium exempt from Provincial Sales Tax?	NO PST is added to the premium as it is group insurance.	YES PST is NOT payable on personal coverage.
Can I Continue the coverage after I pay off the mortgage?	NO The day you paid the last mortgage payment, your mortgage insurance ends. Your death happens the next day after paying your mortgage. You will not get any benefit.	YES When you pay off the mortgage, you can continue the coverage, convert it or cancel it. The choice is yours.
Are there any other options and benefits available?	NO There is no option to add any additional benefits or riders.	YES Various options and riders are available to add to your coverage, such as Accidental Death, Child Term Rider, Disability Waiver, etc.
Premiums	Compare your current mortgage insurance premium with that of a personal insurance plan.

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