1. What is mortgage insurance (creditor insurance) and what does it cover?
Mortgage insurance is a type of insurance that is offered by banks and lenders that protects lenders against loss in the event that a borrower defaults on their home loan. Mortgage insurance covers the lender for a portion of any losses that they incur if the borrower defaults, up to the full value of the loan. For lenders, it provides protection against losses that could otherwise eat into their profits. However, there are many issues with Mortgage Insurance and so it is strongly recommended that you get life insurance from a professional life insurance agent if you qualify. Note that mortgage insurance is used to protect lenders, not borrowers, so these products are designed to help banks and lending companies protect their products.
2. What is life insurance and what does it cover?
For most people, their home is their largest asset. It’s also the biggest financial responsibility they’ll ever have. A mortgage is a long-term loan that allows you to purchase a property, usually with a down payment of 10% or more. The remaining balance is then paid off over time, typically 25 years.
If something happens to you and you’re no longer able to make mortgage payments, your lender could foreclose on your home and sell it in order to recoup the money you owe them. This is where life insurance comes in. A life insurance policy can help to protect your mortgage by providing a death benefit that can be used to pay off the outstanding balance of your loan. This can give you peace of mind knowing that your family won’t be burdened with mortgage payments in the event of your death. It’s an important consideration for anyone with a mortgage, and it’s something that your mortgage lender may require if you’re not already insured.
While insurance through a creditor or bank and life insurance through a licensed life insurance agent may seem identical, there are big differences:
Mortgage Protection via Lender vs. Privately-Owned Life Insurance (from a life insurance agent)
| Mortgage Protection Insurance via Lender | Life Insurance through a Financial Advisor/Broker | |
| Ownership | Mortgage lender holds the policy | You own the policy |
| Beneficiary | Mortgage lender | You Decide |
| Underwriting | Post-claim underwriting: Because underwriting is done after the claim (i.e., after loss of life) your claim may be denied. | Underwriting takes place at the time of application so you know ahead of time whether you will have coverage or not |
| Coverage | Coverage decreases as the mortgage decreases | Coverage remains the same throughout the term of the insurance |
| Flexibility | The mortgage insurance coverage ends once the mortgage ends. Coverage applies only to the same home and the same lender. | At the end of the term, you can choose to renew or convert to a permanent policy because there may be other reasons why you chose to have coverage, and those reasons might still exist after the mortgage is paid off. Coverage is not impacted if you change lenders because the coverage is personal and owned by you. It has no attachment to your home or what you own |
| Regulation | Sold by a financial institution or staff member/mortgage agent who does not have a license to sell insurance. This mortgage agent only has one company’s product available to offer you | Can only be sold by someone licensed to sell life insurance in your province. A licensed insurance broker can choose from a vast array of companies and products across the province for you |
BONUS
Employer-Provided Life Insurance vs. Privately-Owned Life Insurance
| Employer-Provided Life Insurance included in your Group Plan | Life Insurance through a Financial Advisor/Broker | |
| Coverage | The coverage amount is determined by your employer. The amount of coverage is typically 1 – 2 times the annual salary. (May not be adequate to cover your mortgage) Anything extra must be paid for out of pocket | The coverage amount is determined by you. If you qualify, you can purchase an amount that covers your mortgage, or you can purchase as much coverage as you need to cover all the other important things in your life as well. A broker can provide you with the least expensive coverage, and there is no fee or extra cost to using a broker. |
| Control | Employer may decide to terminate your life insurance policy at any time. | You get to decide what happens to your life insurance policy once it is in place. |
| Restrictions | This coverage requires you to stay employed. You may not be covered if you are not “actively” working or if you change jobs. Some companies allow you to “port” your policy, so you can take it with you when you are no longer employed there. Note porting may limit how much coverage you can take with you without having to do a medical. The cost of the ported policy will now be based on your age at the time you port it, not the age you were when you first got the policy. | You stay covered by your life insurance policy if you change jobs or if you are away from work for health or personal reasons. Your policy only ends when you end it or if the term is finished (again, your choice if you want to have a temporary/term policy or a permanent policy that doesn’t end) |
Having a paid-for-by-your-company group policy at your work is not a bad thing. Free is Good!
However, using a Licensed Broker to purchase your own Life Insurance Policy to Supplement your Employer-Provided Life Insurance is a smart move.
