Financial Wellness

Mortgage insurance – some thoughts

Chris and I have been married for 35 years in August. We traveled around for seven years then settled down in Newfoundland and bought our first home. The bank offered us mortgage life insurance along with the mortgage. It did not seem expensive and we thought it was a good idea that if one of us died, the mortgage would be paid off.

We paid for our first home in seven years! Looking back, the mortgage insurance was not a good deal as it was based on paying off a $40,000 mortgage, but our balance went down very fast.

Since then, we have used the equity in our home to finance various businesses. At 43, we needed some working capital for my growing manufacturing business. When I was told how much mortgage life insurance would cost, I gasped, and walked across the street to a life insurance office. I was pleased to find that personally owned life insurance to cover the mortgage was much less expensive than mortgage insurance.

We moved to British Columbia 12 years ago with no jobs, just a belief that we could make a living in a province that has more opportunities for our sons. We bought our home and got ourselves a mortgage (guaranteed by some great friends on the Rock). By this time, we had three different life insurance policies amounting to $350,000 so we did not need mortgage insurance.

However, I did find out that the money we were spending each month on $350,000 life insurance would buy $500,000 if we replaced the three policies with one. The reason is that each policy has annual fees and, the more you buy, the less expensive it is per unit.

We have term 10 life insurance that is contractually guaranteed for the life of the contract. It remains the same for 10 years then it increases very significantly, just check your policy for the details. After about 8 years, we reapplied for $500,000 each and the monthly cost increased by about 20%. This was much less than the contractually guaranteed increase of about 300% after 10 years. People are living longer and the cost of life insurance is going down to recognize this fact.

If one of us dies, we will each have enough money to pay off our mortgage and have a lump sum to replace the income stream of the other as we prepare to slow down – never to retire.

We still have a mortgage and we are concerned about if either of us is diagnosed with a life-threatening cancer, or has a heart attack or stroke. We both have excellent disability insurance, but that will not pay many of the expenses associated with getting better. The Cancer Society estimates that many of the expenses incurred are not covered by the health care system or by employee benefit plans.

Critical illness insurance will help to pay for these expenses. It is paid 31 days after diagnosis of the approximate 20 covered conditions, which include Alzheimer’s – I hope I remember to make the claim!

Personally, we have chosen to add a "return of premium” rider. This means that some or all of our money will be returned to us at a future date if we have not made a claim.

We want to have no mortgage when we are 65. So I analyzed what monthly payments would be required to do this. Then I looked at the monthly cost of critical illness insurance with return of premium to cover the mortgage for each of us. I reduced the monthly mortgage payments by this amount.

By the time we are 65, we will receive enough money back to pay off the mortgage – unless we make a claim. In this case, we will have enough cash to pay off the mortgage.

I’ve been told that it must be so boring being a financial planner – but it’s not. It’s such fun to work with people to work out how to finance their dreams.

Gill Campbell is a certified financial planner and an independent insurance broker. Please email her with specific areas that you would like her to consider in developing future columns.