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

“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.

Buzzwords Much?

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.

Related: Variable and Fixed, Open and Closed Mortgages

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.

Article comments

ol fuddy duddy !! says:

A very good article ! Comments are even better, every day you learn something new. Thanks to Mr. Fiscally fit for give such accurate info !! Luv your blog site Mr. TM keep up the good work !

Kyle says:

Thanks Ol Fuddy Duddy (sweet moniker btw) we appreciate the comment!

Fiscally fit says:

The majority of creditor/mortgage insurance has postmortem underwriting. The couple questions when you sign simply qualify you to pay premium. The certainty that it would pay out is not high enough to warrant purchase in any scenario. Group life insurance also has a level of certainty that does not rival a fully underwritten personally owned policy. As a certificate holder, not an owner, you do not have the same rights as an owner. Again, the level of certainty when including it in your financial plan is not high enough to rely on.
Bottom line, take advantage of the group insurance as it is the most cost effective coverage you can get (usually) but don’t for a second think it can replace a personally held/owned policy.

Ray says:

Well I like to be a devil’s advocate and also because I am an Actuary, I would like to point something out.

You are Young and Thrifty, and Healthy (emphasis added). Although it may be true that you can get term for cheap compared to mortgage life, it may not hold true for everyone. Everyone who qualifies to buy a house, doesn’t necessarily quality for a term insurance because of underwriting and may not qualify in a preferred category that lowers your monthly premium. On the other hand, almost anyone who buys a mortgage WILL qualify for the mortgage life insurance and tends to have higher mortality experience compared to term life because underwriting standards are usually much lower, if any.

So companies have to price in that uncertainty and mortgage life has other options available to them like guaranteed approval if you buy a bigger house. Plus some people may take a lot of money out of mortgage just before they get sick so that they can get a bigger payout.

Plus, if you are paying a level premium, it doesn’t mean that you are overpaying as your coverage is decreasing as time passes. This assumption is already built into company’s model when coming up with that premium.

And yes if you are healthy, it is better to look somewhere else, but if you are not too healthy, it may actually be a good option ( for 10-15% of the people).

Just my opinion, and I am not a sales person so don’t bash on my post but just to give you other point of view.

Teacher Man says:

This is a good point Ray. I respect the fact that as an actuary you almost certainly have better command of the relevant numbers and statistics, and you’re right – there are a select few situations where mortgage insurance might actually make sense. I would argue you’d have to have some pretty negative short term outlooks for it to make sense (in more like 2-5% of cases would be my guess), but the scenario you put out there is one I hadn’t really considered. Perhaps I’ll do a write up on that one at some point in the near future. That being said though, we both know that mortgage insurance is not sold a niche product to protect the people you mention, instead, it is a high margin product that produces a big fat profit for financial companies and is pushed on a lot of people who would be better of elsewhere.

fiscally fit says:

@ Ray

Well Put. MY only issue is when you say that they will qualify for mortgage life insurance, they simply qualify to pay premiums… they are not actually covered. The underwriting occurs post-mortem in which it is then that they determine if you are eligible for the coverage. If not, then they will simply reimburse the premiums that you paid over the last term. If you could not qualify for basic term insurance, you would definitely not qualify for the mortgage insurance. If you are not healthy, mortgage insurance (that does not go through a detailed health questionnaire that may include blood/urine analysis) through your lender is a waste of money. Your best bet is to simply apply for fully underwritten life insurance and find out… instead of just guessing.

This is the main reason that an individual does not need to complete the LLQP (life license) to offer or sell the product. If you are healthy enough to actually have the mortgage insurance pay out, you should be applying for insurance that actually has some certainty that it will pay out if you die.

PS Great topic TM

Teacher Man says:

This is why I love this blog, I write an article thinking that I’ve researched just about every angle, and then I get a couple of experts on the comments that can teach me and the other readers out there even more!

Fiscally fit says:

just for clarification, you do not own your group life insurance, you are simply a certificate holder. But either way it is always pennies on the dollar.

Sandi says:

As a former banker, I can even tell you that every single credit product sold was scrutinized by management for add-on sales like life and disability insurance. Just selling a mortgage wasn’t good enough, and just selling naked mortgages, loans, and lines of credit (oh, and credit cards, let’s not forget them) on a consistent basis meant many coaching and review meetings, suggested scripts, and “objection handling” seminars.

Teacher Man says:

Wow… so pretty much every “salesman” scenario that one would imagine.