How Does Mortgage Protection Life Insurance Work
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Purchasing your first home is one of lifes major milestones right up there with graduating from college or getting your first real job. And as with those other big life moves, the home purchase comes with a host of decisions to make. One of those decisions is whether to sign up for the mortgage protection life insurance offered by your home lender.
What Is Mortgage Insurance Premium
Mortgage insurance premiums are paid by homeowners who take out mortgages backed by the Federal Housing Administration. Up until 2017, mortgage insurance premiums were also tax-deductible. However, in 2020, the Further Consolidated Appropriations Act of 2020 allows tax deductions for MIP and private mortgage insurance for 2020 and 2018 and 2019.
How Much Does Mortgage Default Insurance Cost
As with any insurance, youll need to pay a premium when you take it out.
The amount youll pay in fees will depend on the size of your down-payment and is worked out as a percentage between 0.60% to 6.30%. The more you pay upfront, the lower the fees, so its a good idea to increase your down payment if possible.
A mortgage default premium can amount to thousands of dollars, and can be paid upfront or added to your total mortgage amount and paid off over time. If you choose to add your fees to your mortgage, youll pay interest on them at the same rate as your mortgage.
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Lets look at an example. In Ontario, Tracey and Sam are buying their first home for $500,000 and have saved a 5% down payment of $25,000. Because their down payment is less than 20%, theyll need insurance, which they get through CMHC. In this case theyll pay CMHC fees of 4% of the purchase price, which comes to $19,000.
Pros and cons to consider
There are benefits and things to think about when considering mortgage default insurance:
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What Happens To My Mortgage Life Insurance Policy If My Circumstances Change
Few people who take out a 25-year mortgage end up paying off the same loan a quarter of a century later.
You might, for example, be landed with a loan at a higher interest rate after your initial deal ends, or with a bigger mortgage after moving house. Equally, you might end up with a smaller mortgage if you downsize or make overpayments.
Suddenly, the mortgage life insurance policy that was perfect at the start might not stretch far enough. Or it may be more expensive than you need.
Either way, if your circumstances change, review whether you still have adequate cover. Check how much extra it would cost to cover a larger mortgage.
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With a smaller loan, you might even be able to get cheaper life cover, provided you are not significantly older and your health has not deteriorated.
The biggest issue comes if you take out a joint life insurance policy and then split up or get divorced.
In this case, it can be expensive or impossible to remove one person from the cover unless you paid for a policy that allowed for separation. If you cancel the policy and buy new cover, the premiums might cost more given that you will be older and your health may not be as good.
The issue can be avoided by taking out single policies at the start one for each person. This may only cost slightly more than a joint policy.
An Intro To Mortgage Default Insurance
For many Canadian homeowners, its not possible to purchase a property outright. Instead, the cost is split between what is paid upfront, known as the down payment, and the remainder of the cost thats borrowed, known as the mortgage.
Depending on the size of your down payment, you may also need mortgage insurance, also called mortgage default insurance or mortgage loan insurance. This is different from mortgage life insuranceOpens in a new window, which you may also want to look into when preparing to buy a house.
There are 3 main providers of mortgage default insurance in Canada the Canadian Mortgage and Housing Corporation , Sagen, and Canada Guaranty.
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Term Life Insurance Vs Whole Life Insurance
Unlike term life insurance, whole life insurance remains in effect for your entire life as long as you continue paying premiums. Whole life insurance also has an investment component: You pay premiums higher than the cost of coverage, and the additional money is invested.
Term insurance is going to cost less than a whole life policy, and it generally wont have any cash value, Strohmeyer said. A whole life policy will last for the rest of the customers life and will have a cash value that can be accessed, but it will cost more.
For many people, term life insurance may be a better optioneven if it may not seem that way at first.
Many people want whole life insurance because they feel like term insurance is renting insurance, Keil said. But we never hear anyone complain that their car insurance is a rip-off just because it doesnt have a cash value or that they are missing out because they are renting an apartment. Sometimes renting is the cheapest, best way to go.
How Mortgage Insurance Works
In Canada, you can buy a home of $500,000 or less with a 5% down payment. Homes between $500,000 and $1,000,000 require a down payment of 5% on the first $500,000 and then 10% on the remainder. Homes over $1 million require a down payment of at least 20% on the entire purchase price.
And thats good news for many homebuyers. Saving for a down payment while juggling other household expenses can be a challenge.
The mortgage insurance companies provide mortgage insurance to lenders. The three mortgage insurance companies are CMHC, SagenTM, and Canada Guaranty.
As a borrower, you likely wont deal with your mortgage insurance company directly. Instead, you apply for mortgage financing through your lender. If your down payment is less than 20% of the homes purchase price, youll need a high-ratio mortgage. Your bank or mortgage lender will apply to one of the mortgage loan insurance companies on your behalf.
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How Much Does Life Insurance Cost
The cost of life insurance depends on a few factors, among them, the type of insurance you purchase, the insurance company selling the policy, and your overall individual health, wellness, and family history, in some cases. For example, if you go with a 20-year term life policy, and you are a healthy adult, you could pay as little as $30 dollars a month for a half-million-dollar death benefit. Term life is less expensive than whole or universal life insurance, and all insurance gets more expensive as you grow older.
Whole or universal life insurance is considerably more expensive and could cost upwards of $125 to over $200 a month, depending on your age, health profile, and the amount of death benefit.
Cons Of Mortgage Insurance
One of the biggest cons to mortgage insurance is the cost of the premium. Since its usually added to your mortgage amount, youll pay interest on the money you borrowed plus mortgage loan insurance for the life your mortgage.
Since the mortgage insurance premium is added to your mortgage amount, it reduces your home equity or the degree of your ownership in your home after accounting for the total mortgage amount.
In addition, in Manitoba, Ontario, Saskatchewan, and Quebec, provincial sales tax applies to your insurance premium. However, you cant add that tax to your mortgage, and you have to pay it up front.
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How Does Mortgage Life Insurance Work In Canada
One cardinal fact about how does mortgage life insurance work in Canada is that mortgage Life Insurance is different from life insurance in that it utilizes a system of decreasing payouts. Your premium is calculated by the size of your mortgage and down payment made.
The insurance company will tie the payout to your outstanding mortgage amount. It means that, as you pay off your mortgage, the payout slowly reduces, but your monthly mortgage payment stays the same through the term of your insurance.
How Long Is The Term For Mpi
The term length of a mortgage protection insurance policy generally matches the length of the mortgage being insured. If the policy holder has a 30 year mortgage, than the MPI policy will also be for 30 years.
It can also be limited by the homeowners age, as older buyers are more likely to experience a covered event compared to younger buyers.
Since an MPI policy is not required, it can be canceled at any time. Homeowners may prefer to cancel it to save money once they have a significant amount of equity in their home.
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Mortgage Protection Insurance Faqs
A life insurance for mortgage protection policy is a term life policy designed specifically to repay mortgage debts and associated costs in the event of the death of the borrower. These policies differ from traditional life insurance policies because they are specifically pegged to the mortgage. These policies are also distinct from the mortgage insurance that lenders often insist that you take out. That insurance pays off the amount owed to the lender only should something happen to you, the money will go directly to the lender. Its premiums are usually part of your monthly mortgage payments. And lenders will allow you to cancel such coverage when you have a certain amount of equity in the house and they know they will be able to recoup the remainder of their loan through a sale.
Whole life insurance and term life insurance can all provide a means of paying off your mortgage. With each type of insurance, you pay regular premiums to keep the coverage in force.
Life insurance can be used to help your dependents pay off your mortgage if you die. This type of strategy involves a life insurance often sold as a decreasing-term policy, so your payout reduces as you gradually pay off your mortgage. A life insurance claim is typically paid out as a lump sum.
Whats The Difference Between Life Insurance And Mortgage Life Insurance
The main difference is the payout your loved ones get. With both mortgage life insurance and life insurance policies, there are two policy options – and level-term life insurance.
- Mortgage life insurance is commonly bought as a policy. This means that it pays out less the further into your policy you get. Because it decreases over time, it’s usually more suited to repayment mortgages where your balance is also decreasing as you make regular payments.
- Life insurance is a catch-all name for many policy types, but the most common policy option is level term life insurance. It pays out the same amount no matter when you die, which is why it generally costs more than decreasing term life insurance. It can be used to pay off a mortgage, but is usually more suited to interest only mortgages where monthly mortgage payments only cover the interest and the mortgage balance is fixed. It could be a beneficial choice if there are other debts to consider alongside a mortgage, or you also want to provide some extra financial stability for your family.
Most life insurance policies run for 20 to 30 years, or until you hit a set age limit. If youre still alive after this time period, or after your mortgage is paid off, the policy ends and you get no payout. On the other handwhole life insurance policies are designed to cover you for as long as you want them to.
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Term Life Insurance Vs Mortgage Life Insurance
Both term insurance and mortgage life insurance provide a means of paying off your mortgage. With either type of insurance, you pay regular premiums to keep the coverage in force.
But with mortgage life insurance, your mortgage lender is the beneficiary of the policy rather than beneficiaries you designate. If you pass away, your lender is paid the balance of your mortgage. Your mortgage will go away, but your survivors or loved ones wont see any of the proceeds.
In addition, standard term insurance offers a level benefit and level premium for the term of the policy. With mortgage life insurance, the premiums may remain the same, but the value of the policy decreases over time as the balance of your mortgage declines.
For more information, talk to your insurance professional about mortgage protection and using term life insurance to pay off your mortgage after youre gone.
What Is Mortgage Insurance And How Does It Work
Mortgage insurance, also known as homeowners insurance or private mortgage insurance , protects the lender if you cant repay your loan. This makes it possible for the lender to give you a loan that you might not have been able to get otherwise. However, mortgage insurance increases the cost of your loan. If you must pay for mortgage insurance, it will be included in your total monthly mortgage payment to your lender or may be paid at closing in a down payment.
Different kinds of loans are available to people who want to buy a home but dont have saved money. Depending on your loan, you might have to pay for mortgage insurance differently.
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What Is Mortgage Protection Insurance
MPI is a type of insurance policy that helps your family make your monthly mortgage payments if you the policyholder and mortgage borrower die before your mortgage is fully paid off. Some MPI policies will also offer coverage for a limited time if you lose your job or become disabled after an accident. Some companies call it mortgage life insurance because most policies only pay out when the policyholder dies.
How Mortgage Protection Insurance Works
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The promise of mortgage life insurance is simple and appealing when you die, your family can keep the house with its mortgage paid off. The reality is more complex. For many people, a normal term life insurance policy is a better option than mortgage life insurance.
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Mortgage Protection Insurance Death Benefit
As with any life insurance policy, the main benefit on your mortgage protection insurance is paid when you die. Your mortgage lender normally receives that payment directly, and the benefit amount never exceeds the outstanding balance on your home loan. That means your MPI death benefit gradually declines over time as you pay down the mortgage.
Can Term Life Insurance Pay Off A Mortgage
Term life insurance does not directly pay off a mortgage. However, the death benefit proceeds can be used to pay a mortgage if the insured passes away while the policy is active.
Term life policies provide coverage on the insured person for a specified term or fixed period of time. Typically, you have the option of choosing a 10, 20, or 30-year term, although a 40-year term policy is available. If the insured person dies during the length of the term while the policy is still active, the insurance company will pay a death benefit.
The policyholder, or the person who owns the policy, chooses who will receive the payout, and that person is called a beneficiary. The beneficiary can use the proceeds to pay the mortgage company.
However, term policies arent just for mortgage protection.
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How Does Whole Life Insurance Work
Unlike term, whole life insurance is a permanent form of insurance, allowing fixed death benefit coverage over the policyholder’s life. The life insurance premiums for whole life insurance are higher than what you pay for a term life policy. Whole life contains a cash-value account, which can accumulate as interest accrues on a fixed rate and a tax-deferred basis.
You can borrow against your whole life policy, but the benefit acts as the collateral, so your benefit shrinks if you don’t pay it back. If you don’t pay the premiums or the loan back, your policy will be canceled. Any money you borrowed may be considered income and subject to taxation.
Mortgage Protection Insurance Vs Private Mortgage Insurance
Mortgage insurance may sound similar to Private Mortgage Insurance , but theyre entirely different.
PMI protects the bank or lender in case a homeowner stops paying a mortgage. If youve purchased a home with less than 20% down, your lender probably required you to purchase PMI.
While mortgage protection insurance will pay off your loan when you die, PMI is intended to cover a portion of your loan if you default. The benefit is paid to your lender, not your family.
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Mortgage Life Insurance Vs Term Or Permanent Life Insurance
As you pay down your mortgage, mortgage life insurance covers a smaller amount of money.
Term or permanent life insurance may provide better value than mortgage life insurance. With term or permanent life insurance, the death benefit, or amount payable to your beneficiaries, won’t decrease over the term of the policy. Upon your death, your beneficiaries may use the insurance money to pay for the mortgage.
