Mortgage Insurance: Stay away!

I know in the original post I said I would try to keep as much of an unbiased view on my posts as possible, but for this topic I have no choice but to let loose. Mortgage insurance is one of the biggest frauds in Canada, even though most people don't realize this. One of the things that get 'stuffed' down our throats when getting a mortgage is the concept of 'insuring' our mortgage against any tragedy that might happen to us (whether it be death or illness) -- hence the name 'Mortgage Insurance'. The concept that we're sold is that if anything were to happen to us, the mortgage would be paid off in full, and that at least our surviving family wouldn't have to bear that financial stress; because we know they would have to bear emotional stress.

In this post I'm just going to be very straight forward and tell you to STAY AWAY from mortgage insurance offered by the mortgage providers. For some reason the banks and other companies have been able to get away with non-insurance licensed advisors selling 'mortgage insurance' to clients for years. The reason is they don't technically name the product 'mortgage insurance'; they name it something to the affect of 'liability protection'. But at the end of the day, we all know what the product is, since even the vast majority of bank advisors call it 'mortgage insurance'.

Here are some of the reasons you should think twice before signing those mortgage insurance papers:

- beneficiary is the bank (not your family) -- if anything were to happen to you, the money goes directly to the bank (or mortgage company) and they will pay off your mortgage. Your family will never see the money so they will not be able to decide now how to use those funds

- it works on a declining balance payout -- example: you buy a house with a $300,000 mortgage, so originally your mortgage insurance protection is $300,000. Lets say 5 years later your balance is now $275,000; this means the payout is now only $275,000 and not the original $300,000 EVEN THOUGH your premiums (payments) are the same. They don't lower your premium with the face amount of the mortgage insurance.

- the underwriting is not done at the time of application (THIS IS HUGE!!) -- underwriting pretty much will tell you if you would have qualified for the insurance protection at the time of applying for it. Yes, they ask you some health questions at the time of signing the papers, but the vast majority of the time, those questions are very confusing and clustered. Sometimes they will list 15-20 health conditions in one question and a person might look over one of the conditions. If any of the questions are answered incorrectly (even if you don't know they are incorrect), and the insurance company finds out, they will say you committed fraud and will not pay out anything. Oh, and they will keep all the premiums you paid to them as well!

- usually more expensive then regular term life insurance

Now, we've all heard about companies not 'paying out' insurance, and many of those times we hear about it, it is a case about mortgage insurance. The discussion on mortgage insurance can be a lengthy one, so to help you get a very clear picture of what I have posted, please take a look at the below link -- its a video. The link below is a video from CBC Marketplace on mortgage insurance and gives you in depth points on why to be careful of this. It is just under 30 minutes long, but it is time VERY well spent.

http://www.cbc.ca/marketplace/in_denial/

Other options?

We all need some sort of protection in our lives - some sort of peace of mind - so if not mortgage insurance, then what else? The answer is very simple; regular life insurance (term or permanent). Generally, when you get life insurance, it should already have taken into account all your debts, but if you got your mortgage after your initial life insurance policy or you decided to make up your mind about getting life insurance some time after you got your mortgage, you can add to your existing policies.

In situations where a person already has some life insurance - but doesn't have the mortgage calculated into the total coverage - and they need to cover only the mortgage, term insurance might be the best option for them. We assume that the mortgage will be paid of in x # of years (usually 25 or 30), so someone can get a 20 or 30 year term policy. They do this because they know (or expect) they will pay off the debt in that period of time, and after the debt is paid off, they will not need any additional coverage -- thus saving the monthly premium also.

Keep in mind, that many term insurance policies are actually less in cost then 'mortgage insurance' offered by the mortgage institution. At least with a general life insurance policy in your name, you get to decide who the beneficiary is, the face amount never decreases, and often you can get more coverage for the same amount you pay for mortgage insurance.

Obviously this sort of thing would have to be discussed with your financial advisor, and they would give you all the options and help you decide what is best for your situation. Bottom line, be VERY careful of so called 'mortgage insurance' and also how it is 'sold'. The advisors who sell these products are trained on how to sell and which words to use to 'sucker' you in. I hope this post has been informative and PLEASE watch the video that I posted above; it will only do you good! Please consult your financial advisor before making any decisions and if you have any questions, please do not hesitate to contact me.