You’ve got your mortgage - do you want to add insurance to it?

For many of us, your home is the single biggest purchase you will make. And if you live in Vancouver or Toronto, it was probably a battle to even get into the home ownership game - so it’s completely reasonable that you want to protect this purchase. While you are completing your mortgage paperwork, the bank representative will likely tell you “if you want to protect your mortgage, you can insure it for $xx per month, just answer these two or three questions and sign here”.

Is it truly that easy? With a couple questions and an add on to the monthly payment you’re already making have you protected your family going forward? While mortgage insurance is certainly better than nothing, the unfortunate answer is that it is not quite that simple. Oftentimes, you can be better served by speaking with your Financial Planner or Insurance Advisor and seeking out coverage on your own - for a few different reasons.

1 - Declining Balance

For most mortgage policies, the amount of insurance you are purchasing is the balance of your mortgage. So while you pay down your mortgage, the payment in the event of an illness / death steadily decreases, but your premiums do not. Generally, the rationalization is that they take the average amount of coverage and price for that, so in the early years you should be getting a great deal - and in some cases this is true. However, I’ve run quotes for individuals where you can keep a level amount of coverage and the starting pricing is equal to or better than the mortgage pricing. This also allows you to keep coverage once your mortgage is paid off if needed (or not - the important part is that the choice is yours!)

2 - Who owns it?

This is a common question when it comes to policies, whether employer benefits or mortgage coverage - who owns it and can decide on the terms of the coverage? Generally, in the event of a life changing event you will want to be able to control what happens with your policies. In a mortgage policy though, the bank owns the policy, which means if you wish to change lenders for your mortgage, you will also have to factor in the new lenders cost of insurance versus the current cost. If you have your own policy, you will have already determined the terms of the policy and have set premiums so you can keep your mortgage decisions entirely about your mortgage.

3 - Who is the beneficiary?

This is to me the single biggest reason to take out your own policy. In a mortgage policy, your financial lender is the beneficiary, and the funds will be used to pay off your mortgage. If you own the policy, you get to designate a beneficiary and they get to determine the use of funds. They may choose to pay off the mortgage, or in the event of a critical illness perhaps the funds are used for treatment, or to allow your spouse to take time off work - there is no set “correct” answer and in this case your family can determine what works best for them.

4 - Choices

In a mortgage policy you are limited to what your financial lender offers. If they have disability or critical illness (not all do) you can usually only get those policies if you also take out life insurance with them (regardless of whether you already have coverage elsewhere). The amounts will be limited to your mortgage balance for critical illness and life insurance, and your mortgage payment for disability. If you take out individual policies, you can take as much (or as little) coverage for each item as your needs analysis shows, and take your other coverage into consideration.

5- Underwriting

When is a policy underwritten? For individual policies, it is at the time of application - so by the time you put a contract into place you know exactly what will and will not be covered. In most mortgage policies, underwriting with the application consists of a couple of '“pre-qualifying” questions, but true underwriting occurs at the time of the claim. What happens if the underwriting is unfavourable at that time? The policy is voided and premiums paid are returned. In the case of disability or critical illness, you are likely now medically uninsurable (or at least your rates will be much higher than previously), and for life insurance your loved ones are left with their planning having come undone.

Now, most of us think - well we will just answer the questions honestly and if the underwriter wants to talk to us they will, and if they don’t that means we are fine right? CBC Marketplace actually looked at exactly this with fairly concerning results:

CBC Marketplace “In Denial”

6 - Other benefits

Many individual critical illness policies will include access to services like Best Doctors that can provide access to the best specialists across the globe in the event of a claim. While we may be lucky enough to have excellent doctors at home, adding a top specialist in your illness to your team (they review your medical file and send results, recommended tests, treatments etc. to your physician) when you are in the midst of a life changing diagnosis can add a lot of value and improve your outcome.

Ultimately, your home, income, and estate for your family are all important things to protect and should be carefully considered in regards to your needs, timelines, and budget. I often work with clients to highlight the gaps in their families risk mitigation strategy and show a variety of solutions at various price points to meet their needs (if you think you could benefit from this, please reach out here). While the coverage offered by your lender may seem easy, this is one scenario where putting in some additional work upfront may pay off in the long run.