Whether you are a first-time buyer tackling this new milestone or a seasoned homeowner, buying a home is an exciting time. Accompanying this notable event is the often-necessary task of applying for a mortgage. When going through the mortgage process, your lender will certainly raise the topic of mortgage insurance.  At that time, you may ask – what is mortgage insurance and how does it work? And there is the matter of, how mortgage insurance differs from a life insurance policy.  We’ll shed light on these and other common questions about mortgage insurance.

What is Mortgage Insurance?

Mortgage insurance generally has two classifications, mortgage default insurance and mortgage protection insurance, which is optional.

• Mortgage default insurance is mandatory with a down payment of less than 20% of the home purchase price and is often referred to as CMHC insurance. This type of insurance protects the mortgage lender if you default on your mortgage and there is a shortfall after the lender forecloses on the property.  The cost of this premium depends on your mortgage amount and the size of your down payment. It typically costs 2.8% to 4.0% of the value of the mortgage.
• Mortgage protection insurance includes coverages such as life insurance, critical illness, and disability insurance. This product is offered by your lender and will cover your mortgage payment or completely payout your mortgage in the event of death, critical illness, or disability. This type of insurance is not mandatory. Yes, this is an important protection for you and your family, but you do not need to put it in place with your lender to complete your mortgage. You can purchase these types of insurance personally through an insurance advisor.

How is mortgage insurance different from life insurance?

It is essential to know the key differences between mortgage protection insurance offered by your lender and a personally owned life insurance policy.

Who is protected.

With personally owned life insurance, you own the policy and can make changes to the policy at any time, including who the beneficiary will be. You or your family will receive the benefit and can decide if you’d like to pay off the mortgage or use it for other needs. With mortgage protection insurance, the benefit will be paid to the lender for the balance owing on your mortgage.

Policy portability.

Personally owned life insurance is fully portable.  You do not need to get new coverage if you are refinancing or changing mortgage providers; the coverage is not attached to your mortgage. A lender’s mortgage protection insurance is attached to the mortgage and ends if the house is sold, paid off, or the mortgage is moved.

When death benefits are qualified.

With personally owned life insurance, you are qualified and approved for coverage at the time of application, and once approved, the death benefit is guaranteed. With a lender’s mortgage protection insurance, most of these policies determine whether you are qualified or approved for the coverage at the time of a claim. If they decide at death, you do not qualify for the coverage, the death benefit is not paid out – this is a significant unnecessary risk.

The amount of death benefits.

With lender mortgage protection insurance, the death benefit paid equals the outstanding mortgage balance. As a result, the benefit decreases as the mortgage is paid down, and the monthly premiums stay the same. The death benefit does not decrease with personally owned life insurance, and the total amount purchased is paid to the beneficiary on death.

How much is mortgage insurance?

Obviously, every person and mortgage scenario is unique, so there is no one answer to this question. Generally, personally owned life insurance tends to come in at almost half the price of mortgage protection insurance offered by a lender. For all the above reasons, you get better coverage at a lower cost with a personally owned life insurance policy.

No doubt about it, before you accept a lender’s offer for mortgage protection insurance, you should consider a personally owned life insurance policy to protect you and your family better. For more information about Personal Life Insurance or to contact Christina Wyatt for a personal life insurance advice session, visit our Life Insurance webpage.