A common need for term insurance is when buying a home and signing up for a mortgage. As an aside, the first insurance advice is to get a twenty percent down payment by hook or crook. You can only buy a home with 5% down by paying a huge up front insurance premium to Central Mortgage and Housing Corporation – and it only protects the lender. This cost is almost hidden when you are looking at whether you can afford the PIT payments. But in fact it eats up most of the 5% minimum down payment so your down payment “equity” is almost nil when you begin your mortgage payments.
Whatever financial institution you have applied to will also try to sell you “Mortgage” insurance, often giving the impression that you “have to” for the mortgage to be approved. This is called “tied-selling” and is a violation of regulations. It is also a bad deal. While you make the payments, the bank owns the insurance and makes itself the beneficiary. In some cases, an insurance contract is not even issued (very few bank officials are licensed to sell insurance). It is only “underwritten” when a claim is made and if there were any reason for denial of the original application such as a medical condition, no insurance payout is made. CBC’s Market Place did an expose of this racket a few years ago; it is still online here:
And the financial industry wonders why it has a bad reputation!
Insurance related to mortgages is another example of regulation not doing anything for you. All of the regulated requirements, from CMHC to title insurance and property insurance and traditional “mortgage” insurance only protect the lender. There is no regulation of any insurance requirement that protects the borrower!
More people are using mortgage brokers who deal with a variety of lenders and can advocate for you as the borrower. Benesure created Mortgage Protection Plan marketed through mortgage brokers. Coverage is underwritten by Manulife (who also bought Benesure a couple of years ago, it’s an incestuous business.) Mortgage brokers are regulated by securities commissions and are not licensed to sell insurance. They just print the form, have you accept or waive, and fax it to Benesure. Your business relationship will be with Benesure, who will pay your broker a referral fee. MPP is an improvement over bank insurance in that you “own” it and can transfer the coverage between lenders if you want to renew your mortgage later with a different lender, but it has its own limitations in that the lender is still the beneficiary, and benefits are tied to and limited to the mortgage. Most financial planners today recommend covering a mortgage liability risk with independent term insurance that you own and designate the beneficiary, who can use the proceeds as most needed at that time.
There are other variations of term that an insurance broker, who also deals with multiple companies, can recommend to fully match your needs. Decreasing term products reduce to 50% of the face value over the first two thirds of the term, then level off at 50% for the rest of the term. This can better match a decreasing insurance amount need, as the kids get closer to independence and the mortgage gets paid down, while still giving adequate coverage for the rest of the term. Better matching the coverage to the need will reduce the cost. If a “mortgage” protection plan were maintained as it approached zero face value, one would be paying a lot for not much insurance.