Just Say No To Mortgage Life Insurance

When people get a mortgage, it’s often the impetus that motivates them to take a closer look at their whole financial picture.

They’re worried about a few things. They want to make sure they have enough to afford the house as well as a comfortable retirement. Nobody wants to become house poor. And at the same time, they want to make sure their significant other doesn’t get burdened with an unreasonably expensive debt if they accidentally pass away.

The folks setting up the mortgage know this is a perfect time to try and convince a borrower mortgage life insurance is for them. What better time to remind someone about insurance than right after they sign up for a very long-term commitment?

That’s exactly what they’re counting on. Here’s why you need to say no to mortgage life insurance.

Two big issues

The first big problem with mortgage life insurance is how the product is structured.

It’s a pretty simple product. Borrowers take out a policy which automatically pays out the value of the mortgage if they die. It stays in place for as long as the mortgage is in place, usually 25 years. Payments stay the same throughout the mortgage, slowly getting cheaper as inflation erodes the value of a dollar. And they don’t (usually) have to take a medical exam. They just need to answer a few health questions and they’re good to go.

For the insurance company, this is a great deal. What they do is price the policy based on the value of the mortgage. Each month, as the mortgage goes down, their potential liability goes down as well. After a decade or more, the amount insured really takes a hit as the borrower has paid off the mortgage.

By the end of the mortgage, a borrower might be paying $50 per month for only $25,000 or $50,000 in life insurance. That’s a real crummy deal.

Insurance models are pretty simple. Your chances of dying go up as you age. With mortgage life insurance, the amount of insurance outstanding goes down as the chance of dying goes up, while the monthly premium stays the same.

That’s a great product for the insurance company, but no so much for the person paying every month.

The other issue is how the policy is processed when one of the holders dies. Normal life insurance underwrites the policy before it goes into effect. That’s why you have to have a medical exam before the company will insure you.

A typical mortgage life insurance policy is different. They don’t begin to underwrite the policy until after the policyholder dies.

This can create some issues. Remember those simple health questions asked on the mortgage life insurance application form? Once the policyholder dies, the insurance company goes out of their way to prove the applicant wasn’t being truthful.

The most common one is smoking. If the insurance company can prove somebody who said they were a non-smoker lit up recently, it can be enough to deny the payout. The insurer can claim it would have never insured the policyholder if they knew they were a smoker.

I’ve even heard policies be denied because of heartburn. Somebody goes to the doctor because they’re experiencing chest pains that turn out to be a nasty case of heartburn. They tell the mortgage life insurer they haven’t been checked out for heart issues. When the insurance company completes their investigation they deny the claim because perhaps the doctor messed up the heartburn diagnosis.

Now to be clear, my understanding is most of these policies to pay out what’s promised. There’s just a small chance of a payout being rejected. Still, the risk exists.

A better solution

The solution is simple. Just buy a traditional life insurance policy.

A traditional policy will stay constant in value, which protects the borrower better than the declining balance model of a mortgage life insurance policy. And if borrowers are concerned about over insuring themselves after say 15 or 20 years, they can take out a shorter term life insurance policy that covers the riskiest years. They can then choose to go without insurance when the mortgage value goes down, or get a smaller policy.

And a traditional policy will be much more iron-clad. After a medical exam it’s much harder for an insurer to claim they didn’t know about a health issue.

A traditional policy tends to be sold by a life insurance professional who works with dozens of different insurers. Mortgage life insurance policies are sold by loan officers and mortgage brokers. Who would you rather buy insurance from?

Canada’s Economy and its Effect to the Real Estate Market

In a weekly poll conducted by Nanos Research Group, the respondents who believe that real estate prices will increase in the next six (6) months jumped to 39.4 %. This percentage is the highest in 18 months. On the other hand, respondents who believe that will be a decrease in real estate prices declined to 16.6 % from 17.1%, the lowest since November 2015. The Bloomberg Nanos Consumer Confidence Index gauged from the weekly polls, increased to 55.9 from 55 in the week ending April 15, the highest since the first week of December. The head of Nanos Research, Nik Nanos stated that the surveys broke the perception that Canada’s job security and personal finances are sluggish.

Although the International Monetary Fund foresees that Canadian economy for 2016 and 2017 would slow down; stating the unemployment rate is expected to rise to approximately 7.3% by the end of the year, Canada’s real estate market remains strong. According to Canadian Real Estate Association (CREA), the national average sale price increase in 17%. However, if you take out West Coast and Central Canada regions, the sale price declined by 0.3%. One of the remaining strong players in real estate is in Quebec, with multi-million investments from local and foreign buyers, more than triple the 2014 value. High-quality education in this area remains to be the driving force to attract migrants and international investors. Consequently, Teranet-National Bank Composite House Price Index showed national home prices rose 0.8 per cent last month and 7 per cent from a year earlier.

If you are interested, check out a real estate broker in Mont-Tremblant and its region. This is beneficial for potential buyers because their projected equity will continue increasing.

The Canada’s real estate foreign market is mostly Chinese investors. In Juwai.com, a real-estate property search engine for the Chinese, the searches and inquires for Canadian properties increase to 134%. This indicates that foreign immigrants and investors remain to choose Canada for property investments despite of economic instability. Chinese investments are expected to increase for the coming years especially in Toronto. According to Juwai.com, the total value of all Canadian properties significantly increased to $14.9-billion in 2015 from $5.6-billion in 2014. Toronto earned around $7.4-billion while Vancouver’s searched properties amounted to $2.5-billion.

The national government is currently trying to figure out the recent value of foreign investments in Canada. Nonetheless, that national housing agency estimates that the new condominiums located in Toronto and Vancouver owned by Chines buyers account to about 43 percent.

In UBC forum in Vancouver, global real estate investment was debated upon. A geography professor David Ley discussed the financial and human resources impact of immigration in Canada and United States. Chinese nationals comprised about 85 to 90% among Europe and Asia immigrant-investors.

He also noted that 73% of properties bought by Chinese buyers were paid in cash. In connection to that, the average value of homes bought by a Chinese national in the United States was thrice the price of homes by their American counterparts. The Chinese buyers who mostly belong to the elite and upper-middle class, wanted to escape health risk and pollution, alongside corruption and food security issues.

In the flip side though, Calgary, Saskatoon and Edmonton are the most affected in the recent economic slowdown due to continued cheap oil prices and other trade barriers. Average home prices in Calgary fell 3.05%, while Saskatoon declined in 2.11%.

Interestingly, the Bank of Canada Governor Stephen Poloz refutes the idea that Canada’ economy for 2016-2017 is flat. He believes an increase in the local economy due to government spending.