If you have recently taken out a mortgage, you know that after you are approved and just before you sign the papers, you will be offered mortgage insurance from your mortgage lender. “That will cost you $8 per $1000 of coverage for mortgage insurance.” It may be convenient at the time but before you say yes to mortgage insurance, I would suggest that you weigh some of your options and some of the important issues.
Is it a fair price?
The reality is you will not know if the price is fair until you shop around. Once you start shopping around, you will realize how the price will vary from one institution to another. Lets look at the situation of Rebecca and Garry, who were recently approved for a $200,000 mortgage. Based on their ages 35 and 33, the bank offered them life insurance for $38.00 per month. Is that a fair price?
If Garry and Rebecca shopped around, they would find that they could buy mortgage insurance for $31.00 per month or 18% less than what the banks offered them. In addition to a savings on cost, they would also be getting some added benefits:
- The price would be guaranteed over the next 10 years. The banks insurance rates can be adjusted every year at their discretion.
- The policy would pay on both lives so that if both Garry and Rebecca die, it would pay the $200,000 twice. On the bank side, it would only pay once.
- The private policy at $31.00 per month would pay the $200,000 regardless of what the mortgage balance is at. On the other hand, the banks insurance would only pay out the balance of the debt. They issue a declining amount of coverage.
The main reason for the cheaper rates was that both Garry and Rebecca were in good health and both were non-smokers. To be fair, lets take a look at another couple Jenny and Steve who are both smokers.
Smoking rates make a difference
Jenny and Steve are also ages 35 and 33, but they are both smokers. As a result, their private $200,000 mortgage insurance would cost $50.00 per month while the banks would still offer their blended rate of $38.00. In this case there would be a 24% saving by going with the bank insurance instead of the private policy.
What is interesting is that if Jenny and Steve were three years older (age 38 and 36), they would jump into a higher category at the banks and their bank mortgage insurance would cost them $58.00. A private mortgage insurance plan would also be $58.00. The bank insurance plans typically provide age band every 5 years. It can make a difference whether you are at the low end of the band or the high end of the band.
Not just about cost
While price is certainly important, it is not the only thing that matters when it comes to mortgage insurance. Here are some other important factors to consider before you buy mortgage insurance.
- Flexibility and portability.
- Death benefit usage and coverage.
- Guaranteed coverage and premiums.
- Health factors.
Next week, we will take a look at all these factors in greater detail which will also help us to understand some of the differences between mortgage insurance offered by mortgage lenders versus private plans from insurance companies.
There is no universal rule that can be applied to everyone when it comes to mortgage insurance. Ultimately everyone has unique circumstances and unique situations that require different solutions. As a result, it is not about whether a group insured mortgage plan or an individual plan is better or worse. Rather it is about which is better for you. I always recommend that you talk to a life insurance specialist when it comes to mortgage insurance. They can shop around for the right price, the right product and the best solution to fit your specific needs.