Mortgage insurance versus term life insurance from CBIA
By AdvocateDaily.com Staff
Lawyers looking to insure the investment in their homes may find life insurance a cheaper and more flexible option than the more traditional mortgage insurance, says Dawn Marchand, the vice-president of marketing and direct distribution for the Canadian Bar Insurance Association (CBIA).
“Life insurance is the cheaper option and it also gives survivors more control over the money,” Marchand tells AdvocateDaily.com.
While neither option is required when financing a new house with at least a 20 per cent down payment, many homebuyers rest easier knowing that their loved ones can continue to live in the family home should they die before the mortgage is paid off.
Although mortgage insurance will pay off the mortgage, that’s about all it will do, says Marchand.
She uses the example of a 41-year-old man buying a house. He qualifies for a $750,000 mortgage through the bank and he’s offered mortgage insurance for $217 a month. Marchand says this 41-year-old non-smoking man could get term life for $750,000 through the CBIA for only $42.50 per month.
The savings for women are even greater. A 41-year-old female non-smoker would still pay $217 for mortgage insurance, but her CBIA term life premium would only be $31.63 per month.
“The savings in monthly payments are only the beginning,” says Marchand. “If you have life insurance, the benefit amount never goes down. If you bought $1 million of life insurance, you will have that life insurance until the term is up.
“With mortgage insurance, the amount of overall coverage decreases with each mortgage payment made. As your mortgage reduces, your coverage goes down, but your premiums do not,” she explains.
For example, after 10 years of payments, the mortgage on that 41-year-old’s house may be down to $400,000, so that’s what the insurance on the mortgage is worth. With life insurance, on the other hand, your policy is still worth $750,000 — and you’ve paid a lot less for it over those 10 years, says Marchand.
While mortgage insurance could be what some homebuyers are looking for, Marchand says it’s definitely worth exploring life insurance with a financial planner.
She suspects that some people view mortgage insurance as an automatic part of buying a home and some may even worry that not buying into a policy may affect their chances of getting financing from the bank.
“First-time homebuyers can be even more nervous about the whole process. They’re young — often in their 20s or 30s — and that’s the time when the term life insurance is the most affordable. They could get quite a bit of insurance for less money and have all of the other benefits of ownership and control and portability.”
While mortgage insurance is obviously targeted directly at paying off the mortgage in the event of a homeowner’s death, life insurance is much more flexible, says Marchand.
“Let’s say you have $1 million of life insurance and your mortgage is only $400,000. You could pay off the mortgage and have $600,000 left. The surviving spouse doesn’t even have to pay off the mortgage. Maybe they can handle the mortgage payment and it's at a good interest rate, they could keep paying the mortgage and use the $1 million whatever way they want.”
Mortgage insurance might be more convenient, says Marchand. It’s quick and easy and it’s provided through the bank. Typically, it only requires a few health-related questions, while life insurance is a longer process that requires some digging into one’s medical history.
“So there is a bit more upfront work to do with term life insurance because you may have to go through underwriting,” explains Marchand. “Depending on your age and health, though, the rates are much better than with mortgage insurance, where there isn’t even a benefit if you’re a non-smoker, for example.”
Plus, she says, if you sell your home and buy another, you’ll have to apply for a new mortgage insurance policy. With a term life insurance policy, coverage remains intact as long as the premiums are paid.
CBIA offers insurance and financial solutions to the legal community, their families and employees in Canada.
According to the CBIA’s website: “Unlike a typical association program, we don’t simply endorse an insurance company’s products. We employ insurance experts who, with the assistance of actuaries and the underwriting insurers, design, price, and manage our own products to ensure a superior designed benefit at the lowest possible price.”