Located in scenic Hamilton, Ontario, the Canadian Warplane Heritage Museum is a must-see for children and adults alike. History buffs and aviation fans should note that the museum houses one of only two airworthy Lancaster bombers remaining anywhere in the world, right in our backyard! Hamilton residents are lucky to have this unmatched collection of Canadian aviation history.
Buying a home is an exciting time, and there are many decisions to make along the way. One of the most important decisions is how to protect your new financial investment. For many people, their home is the most expensive asset they will ever purchase, so it is critical to protect your investment properly.
You may be wondering what insurance product can help you once you have purchased your home. There are several options to pick from and risks associated with each. As a home buyer, you may be offered mortgage insurance, but is that the best choice to protect your investment?
Read on to learn more about the risks of mortgage insurance, then contact the experts at Hometown Life Insurance to learn more.
What is Mortgage Life Insurance?
Mortgage life insurance is a type of life insurance policy that can be purchased by mortgagers and is designed to protect the interests of the mortgagee, that is the bank or financial institution that issued the mortgage.
The insurance benefit from a mortgage life insurance policy pays off or pays down the remaining mortgage should the policyholder die. This protects your heirs and allows them to remain in the home without worrying about how to pay for the mortgage.
One point of clarification – mortgage insurance through the Canada Mortgage and Housing Corporation (CMHC) that is required by the government for individuals who put down less than 20% is a different product from mortgage life insurance. The mortgage insurance through CMHC is protection for your lender in case you default on your loan.
When is Mortgage Insurance Used?
Mortgage life insurance may be purchased when you take out a mortgage to buy a new home. Mortgage insurance can be easy to get at the bank when you apply for your mortgage, and the application process is streamlined at that time.
Loan officers and mortgage advisors often sell this coverage when asking new homebuyers to sign other mortgage-related paperwork. It is important to ask questions and understand what you are signing.
What are the Risks of Mortgage Insurance?
There are some risks and downfalls of mortgage insurance that you should know about before purchasing this coverage.
Decreasing Policy Benefit – One of the pitfalls of mortgage life insurance is the benefit amount decreases over time as you pay off your mortgage. Because the coverage is designed to pay off or pay down the mortgage, as your mortgage decreases, so does the benefit of the policy. This can seem counterintuitive as many other life insurance policies feature a benefit that does not decrease over time.
Lender Protection Instead of Family Protection – Mortgage insurance is, by its design, meant to protect the mortgagee or lender, not the homeowner or their family. The coverage does help families to keep their homes when it pays off the mortgage. However, the point of the coverage is to protect the lender, not your family. The lender remains the owner of the policy. Other life insurance products are designed to protect the policyholder and their beneficiary and are owned by the policyholder or their designee.
Post-Claim Underwriting – The application process is easy and streamlined for mortgage life insurance, which makes it popular for individuals when they purchase their home. However, without the usual medical review and underwriting process to get approved for a new life insurance policy, it is likely your underwriting process will take place after the claim is filed, which can cause delays and worries at a stressful time. Post-claims underwriting can save time at the beginning of the application process but can cause claims to be denied if something with your claim violates the insurance contract. leaving your loved ones in a desperate financial situation.
Expensive Premiums – Your premiums are based on your age since it is more likely you will use the benefit of the policy as you get older. You will need to renew your mortgage life insurance policy when your mortgage refinances or renews. Even as your mortgage balance decreases over time, you will likely see your life insurance premiums rising due to your increased age. This pricing gap will continue to grow compared to life insurance, further illustrating the benefits of life insurance over mortgage insurance.
What are Alternatives to Purchasing Mortgage Insurance?
There are alternatives to purchasing mortgage insurance that may work better for your needs. Consider purchasing life insurance instead of mortgage life insurance to protect your family. Your financial needs include protecting your home, but that is not the only asset or consideration when purchasing life insurance.
You can purchase different life insurance products to protect your family and make your own decision about how to handle any remaining mortgage. Your family may prefer to sell the home and pay off the mortgage with the proceeds from the sale, or they may prefer to earmark a term or whole life insurance policy for this purpose.
Utilizing life insurance products you have researched, selected, and purchased to best meet your specific financial needs and goals makes more sense than buying a mortgage life insurance policy with all of its limitations and downfalls.
Final Thoughts
Mortgage life insurance can offer limited protection to pay off your mortgage, but it may not be the best insurance product for this purpose. Because of its limitations and risks, like its higher price and post-claim underwriting, mortgage life insurance is often disappointing, and its benefit value decreases over time.
Employing various other life insurance products to meet your needs can be a better solution as other policies offer flexibility in how policy beneficiaries use the benefit. Some products give dividends and allow for cash withdrawals during the policy period, adding to their attractiveness over mortgage life insurance which does not offer such benefits.
How do I Learn More?
Now that you know more about the risks of mortgage insurance, you can contact the experts at Hometown Life Insurance for more information. Our licensed professionals will be happy to answer any questions you have.
Sources:
- https://www.warplane.com/
- https://www.canadalife.com/insurance/life-insurance/mortgage-insurance-vs-life-insurance.html
- https://www.cmhc-schl.gc.ca/en/buying/mortgage-loan-insurance-for-consumers/what-is-mortgage-loan-insurance
- https://www.canada.ca/en/financial-consumer-agency/services/mortgages/optional-insurance-products.html
