What is mortgage insurance? Do you need it?

If you are perplexed over what to think about mortgage insurance, you are not alone. Many Canadians don’t know how it works. It is not the same as Canada Mortgage and Housing Corp.’s mortgage loan insurance, which is mandatory for buyers whose down payment is less than 20 percent of the purchase price of a home. Mortgage insurance, on the other hand, covers your mortgage balance if you or your partner were to die or become seriously ill with money still owing on your home.

When you’re signing all the mortgage papers the bank puts in front of you, your banker will ask you to initial a document to either insure or not insure your mortgage. Which box do you check?

The truth is, most Canadians don’t need mortgage insurance, so long as they have another form of coverage: life insurance. Standard life insurance will provide for your family under the same circumstances as mortgage life insurance, but is more flexible and won’t decrease in value as you pay off your home. However, if you have a condition or illness that might make it difficult to get life or disability insurance separate from your mortgage, then mortgage insurance makes sense.

The biggest point against mortgage insurance is that it protects the lender more than you. Ensuring that your mortgage will be paid off is of course helpful to your family, but it goes back to a regular life insurance policy. If your family receives compensation, it can be put toward the mortgage at a ratio of their choosing, not at a ratio of 100 percent.

The other issue is that the premiums remain stagnant, even as the mortgage is paid off.

An example would look like this: you get mortgage insurance to cover a $700,000 loan and pay $60 per month in premiums. After years of paying down your mortgage, getting it down to $250,000, you fall ill. The pay out from your policy only covers the remainder, not the original $700,000.

In contrast, if you get term life insurance, you are always paid out the full amount, not the remaining balance. Another drawback with mortgage insurance is that it’s non-transferrable, so premiums are lost and the policy is cancelled if you move.

If you are having a difficult time getting disability or life insurance because of your illness, mortgage life insurance can be helpful. Otherwise, you should at least compare the option against regular life insurance. So long as the premiums are in the same ballpark, the latter may be your best bet.