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    Mortgage Insurance: Expert explains

    “Mortgage Insurance is a life insurance policy to cover your mortgage. Now, you can get mortgage insurance generally through a lending institution or through the individual life insurance policy from a life insurance provider. Mortgage Insurance through a lending institution will be tied to your mortgage, so it goes down as your mortgage goes down. That’s also not portable – if you switch lenders or if you move to another home, you’d have to re-apply for mortgage insurance whereas individual life insurance – you can tie it in with your other insurance needs and it will pay off your mortgage and provide some level death benefit. You choose you own beneficiary so you can have your spouse, your child, your family members as beneficiary. And, if you are $500,000 in coverage, and your mortgage is $300,000, the beneficiary will have $300,000 to cover the mortgage plus $200,000 to cover the other costs. So, you have a lot more flexibility there and are choosing your own beneficiary and the coverage amount. It’s also portable, if you move to another home or go to another bank, you know, take on an additional line of credit – it gives you a lot more flexibility in terms of how you set up that coverage.”

    Mortgage Insurance: Background

    You have just spent months shopping for your dream home, then weeks looking for the best mortgage rate. Your lender suggests taking out mortgage insurance to protect your prized asset. On the surface it sounds like a good idea – protecting your loved ones against an unforeseen illness or death seems like a prudent decision, so at the lender’s suggestion you decide to tack on the premium to your mortgage payment.

    This scenario unfolds hundreds of times each week throughout Canada, yet many consumers still do not realize that they may be getting ripped off. The basic premise behind mortgage insurance is sound; the problem is that, in most cases, consumers blindly sign up without taking the time to examine their options. Mortgage insurance offered through a lender just does not offer the flexibility available with individual insurance policies offered through life insurance companies, and in most instances the coverage is significantly more expensive through a lender.

    Mortgage Insurance: Important to Know

    Let’s take a closer look at a few mortgage insurance specifics:

    1. The mortgage insurance coverage amount with a lender declines as your mortgage balance declines. The coverage amount on a separate policy remains the same, even as your mortgage shrinks.
    2. Mortgage insurance through a lender is not portable. An individual mortgage insurance policy through an insurance company is owned by you – you can keep it if you switch banks, pay off your mortgage or move to a new home.
    3. Mortgage insurance through a lender only pays out a benefit equal to the mortgage, even if both spouses die. Individual policies will pay out twice the amount in the event of a simultaneous death.
    4. A mortgage lender’s insurance names the bank as beneficiary if you die. A separate policy allows you to choose your own beneficiary.
    5. Mortgage insurance through a lender is not convertible to a permanent insurance policy. An individual term policy through an insurance company is convertible without a medical to a permanent policy – providing lifetime protection and the ability to generate a tax-sheltered cash value.

    Benefits of individual life insurance coverage versus mortgage life insurance

    Individual life insurance can be tailored to the amount of your mortgage, or the insured can combine their life insurance needs with their debt protection needs. Individual life insurance for a mortgage, can either be Term or Permanent insurance. Term insurance policies are fixed for a stated term, such as a 10, 20, or 30-year term. Whereas, a Permanent policy can provide level premiums for the insured’s lifetime. Permanent policies can also build a cash value and can be paid up in a limited number of years.

    Here are several additional benefits of individual life insurance versus mortgage life insurance:

    1. The coverage is portable – if you move homes or switch to another bank.
    2. The insured chooses the beneficiary, rather than the bank.
    3. The individual plan pays out double in the event both spouses die.
    4. One can combine Term and Permanent insurance needs under one plan.
    5. Coverage can be maintained even after your mortgage is paid-off.

    Using Life Insurance to protect your mortgage

    Instead of going for expensive mortgage insurance, it is much wiser to get a life insurance policy to cover your mortgage.

    An overview below shows key differences between Mortgage Life Insurance and Individual Life Insurance

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