“So I assume you’ll be wanting mortgage life insurance as well then?”
And with these neat little phrase hundreds (if not thousands) of people instantly feel compelled to make an inefficient purchase (I won’t say “dumb”) every day. If you’re a shareholder of one of Canada’s major insurance companies or Big Six Banks then these words are responsible for making you a nice tidy profit on a product with a ridiculous good profit margin.
Mortgage insurance does seem like a great idea on the surface. The emotional pull of “taking care of your loved ones if tragedy strikes” is quite persuasive. Emotion shouldn’t trump logic however. Yes, it is good that you want to take care of your loved ones. It is smart of you to think ahead and make sure they are provided for. Despite what the salesperson in front of you might be saying however, mortgage insurance is not the best product to do this. No matter how many buzzwords such as “responsibility”, “financial hardships”, “fiscal headaches”, and “pain and loss”, get mentioned, don’t be fooled into thinking that mortgage life insurance is a good idea.
The main reason that mortgage insurance isn’t a good idea is just basic math. Salespeople can spin arguments whichever way they want in order to sell their product – this is what they get paid for after all, and they get to hone their craft day-in and day-out. It has been well-documented by the National Association of Insurance Commissioners (NAIC) that mortgage insurance lenders pay out only about 40% of what they take in. In comparison, lenders of regular term life policies payout about 90% of what they take in. The massive different between those two numbers means money coming out of your pocket no matter how you slice it.
My Level of Concern For Your Loved Ones is Directly Correlated to the Size of My Commission
I’ve had a representative of a Big Six bank strive to convince me that, “Yes, your other insurance is good to have as well, but do you really want to leave your loved ones with a huge mortgage hanging over their heads in the event something were to happen to you for any reason?”
First of all, the intimidation and manipulation that is coated in false concern over my family here is sort of disgusting if you focus on it long enough. But I digress…
I answered the sales associate: “I don’t understand why my loved ones wouldn’t be able to use the insurance payout from my term life insurance to pay for the mortgage if they decided that was the best use for the money. My mortgage isn’t that large after all.”
To which they responded with something along the lines of, “But there are so many costs to account for and consider for the long-term, it is really the best policy to make sure that your loved ones are guaranteed to have a roof over their heads.”
Related: Insurance and Why you Need It
Protection is Good, Paying More is Bad
At this point I politely wrapped up the conversation and walked out. What a ridiculous argument – but probably a very effective one in the financially illiterate world we live in I thought to myself. After all, how many of my graduating grade 12 students would have any idea to begin comparing the cost-benefit ratio of mortgage life insurance and time life insurance? How many would read anything about the topic after leaving high school? The combined answer is likely below 2%, and definitely below 5%.
The truth is that when it comes to insurance, determining how much you need for your specific situation, and then comparing/negotiating the best term life insurance package for your needs will always give you the best bang for your book. It’s something that the Wealthy Barber taught be long ago, and something that has been reconfirmed for me countless times since.
Related: How To Port A Mortgage
The Advantage of Term Life Insurance
Your insurance needs will likely change over time, depending on variables such as your marital status, the number and age of your children, your income and assets, and preferred lifestyle. Term life insurance allows you to adapt to these shifting demands. Does it mean you might pay some relatively big premiums when you’re 60? Possibly, but then again most people don’t have nearly the need for insurance at that age, so it’s tough to say. Many mortgage life insurance plans don’t change much as you pay the mortgage down, which means you’re paying the same premium for an ever decreasing amount of risk protection. This is likely one of the reasons the profit margin for the product is so high (and likely why the salesperson is pushing so hard for a big commission).
In my situation I have access to a pretty great life insurance plan through my job as a teacher. If you were for a large company, are part of a union, or work for any level of government, you likely have a pretty advantageous life insurance plan available to you. By my calculations, increasing my coverage by the size of my mortgage would cost me about 1/3 the amount of mortgage life insurance. I can also easily adjust it from year to year, so that’s an advantage as well.
Don’t allow your thinking to be clouded by appeals to your emotional side that don’t make logical sense. Boosting the financial institutions’ profit margins by spending more money won’t protect your family any better, it will only mean a little less money for everything else at the end of the month.