Mortgage Life Insurance for New Homeowners
A new home is often the manifestation of years of hard work that is finally paying off. As a new homeowner, you are filled with hopes and dreams for the happy memories you will make in your home with your family and loved ones by your side. If you live in Canada and have a mortgage with the bank, you may be led to believe that there are many benefits of mortgage life insurance protection from the bank. While it is the easiest way to receive mortgage protection, there might be a slight catch. Let’s delve into the world of mortgage life insurance and let R.W. Insurance demystify the process for you, so you can make an informed decision when it comes to choosing the best life insurance policies.
Mortgage Life Insurance Ontario: How it Really Works
Unlike your regular life insurance policy, mortgage life insurance has a system of declining payouts. Your premium is based on the size of your mortgage while the payout is based on your outstanding mortgage. This creates a divide between the premiums and the final payout. As you pay off your mortgage, your payout decreases with the decreasing amount of outstanding mortgage, but your monthly premiums remain the same.
Things to know Before Buying Mortgage Insurance from the Bank
Are you planning on buying mortgage insurance from the bank? There are some hidden details that might change your mind about it. Here’s all you need to know about mortgage insurance to make the right decision when the time comes:
On rare occasions a lender or bank employee may convince you to buy mortgage insurance by telling you that it is mandatory for your mortgage. This illegal practice is known as tied selling. These claims are completely unfounded as mortgage life insurance is an option, not a requirement. Banks may push you to buy these policies as it means a higher profit for them. The banks purchase these policies in bulk from popular insurance companies and then resells them for a smaller amount of coverage to mortgage clients with a healthy profit from the premiums.
Many buyers are often misled by the terms of mortgage insurance provided by the banks. The coverage of a mortgage insurance is connected to your outstanding mortgage. This means that as you slowly pay off your mortgage debt, the coverage also decreases. But here’s the catch: as your coverage declines, your premiums remain the same. This can add up to become a very expensive solution overtime. On the other hand, choosing a life insurance policy instead of mortgage insurance from a bank can provide you more financial security and protection at a lesser price. Regular life insurance will give you the benefit of fixed coverage and fixed premiums for a specific period of time according to your liking. This will at least ensure the financial stability of your family in your absence.
It might come as a surprise to many but mortgage insurance may not provide complete coverage which results in decreased financial stability in the future. With the help of some complicated underwriting, banks keep a special eye on every aspect of your medical history, lifestyle and financial status. Many Canadian citizens might not qualify for the coverage due to their high-risk lives or health conditions. If you happen to mention fatal ailments, disability or terminal illnesses on the application, your coverage will most likely be declined. Apart from these factors that appear in writing, there are other factors that may determine the fate of your financial security and protection. The only way to find out if you receive coverage or not is when you make a claim. This is when your coverage may be denied or accepted. In such a scenario, many distraught claimants have had to collect their loved ones’ medical history to provide evidence for their health when they filled the application. This gives the bank considerable leverage and causes a difficult time for the loved ones you leave behind.
When it comes to life insurance, your coverage is either accepted or declined upfront instead of when you make a claim. In a regular life insurance application, you might have to go through some medical testing that will be reviewed before you’re offered the policy. If you fit the insurable category, the insurance company will offer you the policy. In case of a claim, there will be no dispute because the insurance company already has all the medical data, they need to confirm the authenticity of the claim. High risk applicants may be offered an increased premium or declined coverage. Since all this happens upfront, you don’t have to wait for your loved ones to discover the unsavory news in your absence.
If your family files a claim after a loss and successfully proves your insurability, the mortgage insurance will pay off the outstanding mortgage. However, that is only one of the expenses your family needs to take care of in your absence. Even though the mortgage is paid off, they still have to deal with your loss of income and other final expenses resulting from the tragedy. This may mean that your family will be in debt from other sources. While the mortgage insurance has done its job, it doesn’t always prove to be completely useful in practice. On the opposite end, an individual life insurance policy will pay your family a lump sum, tax-free payout without enforcing where the funds need to be spent. This gives your family the flexibility to choose where to send the money to ease their financial burdens. In this way, your family gets a more complete and flexible coverage that ensures the best possible usage of the funds.
Some years down the line you may want to refinance for renovation or switch to another lender offering a lower mortgage than your current one. This is when you will realize that changing mortgage lenders may not be as easy as you thought. Usually, mortgage insurance policies are group policies that belong to the bank you get your mortgage from. So, if you refinance or switch to another lender you will end up losing your coverage. On top of that, you will have to go through the whole process of qualifying for another mortgage insurance policy. This comes with its own disadvantages. As you have grown older, this mortgage insurance policy will have a higher premium than before. Not only that but the new bank may decline your coverage based on the new medical conditions and health status
Other Forms of Mortgage Insurance from the Bank: Are they any Good?
On top of regular mortgage coverage, banks may offer you additional coverage for disability or critical illness. But is this coverage worth it? Let’s take a look at how disability and critical illness coverage works and if you should opt for these options or not:
If you are completely disabled and unable to earn income then you may be eligible for the disability mortgage insurance at your bank. This insurance covers mortgage for up to 24 months but does not apply to partially disabled individuals who are earning some form of income. The benefits of this insurance become null and void as soon as you return to your job. The eligibility criterion is only for individuals with a long term disability of up to 2-3 months. This means that injuries and illnesses are not covered by the insurance. Since this insurance covers you for only 24 months, you will have to pay the mortgage on your own after that even if your disability continues. This can be unfeasible in the long term and end up being more expensive than a regular personal disability insurance. Instead of opting for this plan, people living in Canada can just benefit from the income tax coverage through their employer. And save the premiums for personal protection and wellbeing.
Along with the disability coverage some banks may also offer critical illness coverage to help you remain financially stable. This insurance covers your mortgage debt in case of a severe critical illness. However the extra coverage comes with an extra premium.
Technically, if you and your partner are covered in the mortgage, you will be paying for coverage and getting only one possible payout from it. If you and your partner remain healthy, the bank will be making a huge profit from the premiums. On the other hand, if one of you becomes critically ill, the bank pays off the mortgage and the other plans get cancelled because the mortgage is now paid. The other partner will now have no protection from the critical illness coverage or the mortgage insurance since the mortgage is already paid. This means that the bank successfully made huge profits by charging you for premiums and no matter what the outcome may be for you, the bank will be getting their due share.
This may sound surprising but mortgage critical illness coverage comes out to be way more expensive than any personal critical illness policy. Just like life insurance, it provides you with a set coverage for the desired number of years and is not connected to your mortgage. In case of a severe illness, you get the tax-free lump sum amount which you can use as you please. This provides you the flexibility to utilize your funds how you wish and also ensures that you pay for what you will get. Even if you get a payout on the critical illness insurance, your life insurance remains intact with your beneficiaries getting the financial support they deserve in your absence. This makes regular critical illness insurance a much better deal.
If you have recently purchased a home, you may have put a down payment on the house. Generally, banks require to pay at least 10% down payment in case you are getting a loan. However, 10% doesn’t quite cut it for the bank. To be more secure about your loan, banks require you to get another insurance known as the Private Mortgage Insurance.
If borrowers pay less than 20 percent of the cost of the house as down payment, they need to pay a private mortgage insurance. A private mortgage insurance or PMI is from private insurance companies and it protects the lenders against losses in case the borrower defaults on their payments. Through PMI, borrowers can gain eligibility to receive loans by lowering risk for the lenders. Such loans can be the saving grace for new homeowners who need to make ends meet when it comes to the granted loan and 20% down payment. However, it is essential to know more about how much a PMI might actually cost you before going for it.
The cost of private mortgage insurance varies and depends on a number of factors such as the worth of your house and your down payment. The PMI will cost more if the down payment is less. So if you pay 10% down payment, the PMI cost will be greater than if you paid 15%. Until you get to the 20% mark of down payment, you will have to pay the extra amount of money each month with your mortgage payment. It is essential to take this extra cost into account when you are looking to purchase a house. You need to adjust your down payment and cost of the house accordingly. If you will not be able to pay the exorbitant additional costs of PMI associated with your down payment, it is better to reconsider your strategies.
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