Life Insurance versus Mortgage Insurance

Life Insurance versus Mortgage Insurance, is what some of my clients ask me when they are purchasing a house. A financial advisor I know in Ottawa shared with me a practical chart to explain the difference between life insurance and mortgage insurance:

PERSONAL LIFE INSURANCE MORTGAGE INSURANCE
  • Insures you
  • You decide who to name as your beneficiary
  • Renewable, convertible term insurance
  • Underwriting is done at the time of application
  • You determine the amount of the coverage; your coverage remains same
  • You own the policy
  • It is yours, you keep it
  • Your beneficiary decides how to use the money
    • Insures your mortgage
    • Lender is the beneficiary
    • Non-renewable, non-convertible term insurance
    • Underwriting is done at the time of the death
    • Covers the exact amount of mortgage balance; as you pay down your mortgage your coverage decreases but your premiums remain same; cost per $1000 of coverage increases
    • Lender owns the policy
    • When you change your lender you cannot transfer your insurance
    • Lender automatically pays remaining mortgage balance
    • Shared by Nilay Erisoglu, Financial Security Advisor, Freedom 55 Financial Nilay.erisoglu@f55f.com

Let me go through some more details of Life Insurance versus Mortgage Insurance

Life Insurance

Mainly life insurance is used for insuring yourself, you decide who you name as the beneficiary (your spouse, family member, etc) and they decide on how to use the money, the amount of money paid out to the beneficiary never changes.

Life insurance is also renewable, and convertible term insurance. In Life insurance you have protection for the duration of the policy. The duration usually is around 10 to 30 years or sometimes to an age like 70 or 80. It all depends on the term you purchase and the underwriting is done at the time of the application.

In life Insurance you determine the amount of the coverage; your coverage remains same during the policy. When you plan to sell or change lender for you mortgage, your life insurance remains the same and does not get affected, it stays with you.

Life insurance is usually less expensive than mortgage insurance. Although a note of caution that if you intend to get for another term, you could potentially be paying a higher premium depending on the age and your health. Typical the enrollment process for term life insurance is more complex than applying for mortgage insurance, since life insurance policies require a medical exam in order to secure coverage.

Mortgage Insurance

Mortgage Insurance insures your mortgage, and the lender is the beneficiary (not someone whom you have named). It is non-renewable, and it is non-convertible term insurance. Typically the underwriting is done at the time of the death. Mortgage insurance covers the exact amount of mortgage balance; as you pay down your mortgage, your coverage decreases but your premiums remain same…

In Mortgage Insurance the lender owns the policy and if you change your lender you cannot transfer your insurance to the new property. The lender automatically pays remaining mortgage balance in the case of death.

Some advantages of mortgage insurance are that they are very convenient, they often do not require any medical exam. You typically will purchase the insurance through your bank or the financial institute that lend the money for your mortgage. Mortgage insurance is usually added to the lender’s monthly mortgage payments.

The downside of mortgage insurance is they are usually more expensive than life insurance although more easy to attain from a bank. CBC Marketplace also did a series of mortgage insurance.

I hope this blog post helps explain the difference between Life insurance versus Mortgage insurance and last but not least I hope your winter is going well with a lot of fresh air experiences and you are getting ready for a wonderful spring coming up with high energy.,..Whether your plans to relocate, to downsize, to aim for a change or investment, give me a shout and lets get the ball rolling for your next chapter…

Cheers!

Written by Nilay Ertemur

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September is almost here. You might want to start your house hunting soon again. Insurance is an important factor and step of house purchasing plans. Homeowner insurance premiums are not always cheap, but if you are buying a new or old home you will need to protect yourself and your investment from big surprises. In this post, I will list out top 10 home features that will raise your insurance premiums.

  1. Swimming pools and hot tubs can raise your rates, due to their potential for people drowning in them, although adding some type of fence to enter the pool does lower the liability
  2. Wood shake, cedar shingles are “no no” for insurance companies, some insurance companies even would refuse to renew existing homeowner insurance policies for roofs older than 20 years without passing an inspection; wood shake roofs have a higher vulnerability to weather hazards and fire.
  3. Expensive items: This one is simple, if you own expensive items; painting, jewellery, art, musical instruments, wine collections, the insurance would go up.
  4. Aluminum wiring was used in houses up to 1970, they have potential to overheat and cause fires, all insurance companies will require you to have an inspection and a highly strong recommendation of replacement.
  5. Knob and tube are very old wiring they are not well-suited to today’s high energy consumption products, and a significant number of insurance companies consider knob and tube wiring a higher risk or unsafe.
  6. Wood stoves are a source of fire and smoke damage. Even with modern wood-burning stoves, they are prone to crackle, sparking and spitting causing fire hazards.
  7. Oil based heating system, tend to have a higher risk of leaks with oil tanks and potential for damage to your property as well as the potential for environmental hazards. Most insurance companies prefer forced-air gas furnace or electric heat
  8. If you have a home office and it is part of your business, your insurance will go up since you may have potential customers or suppliers visiting your home and there are certain liabilities that pertain to businesses
  9. Finished basement can drive up costs because of potential damage if a pipe bursts or sewage backs up, or there’s flooding; these all would drive the cost up for replacement thus driving up the cost of your insurance
  10. Galvanized or lead pipes are older types more likely to build up corrosion increases, the risk of cracking, leaking or other damage. Copper or pex plastic pipes are recommended more by insurance companies  When you are shopping for a home, allow me to help you in finding the right one so that you don’t get affected by unknowns including the cost of insurance. Cheers! Author: Nilay Ertemur

 

References:
http://www.melochemonnex.com/en/residential/articles/home_insurance_calculation

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The cost of mortgage default insurance is about to go up for most consumers, effective May 1st, 2014  CMHC Purchase (owner occupied 1 – 4 unit) mortgage insurance premiums will increase by approximately 15%, on average, for all loan-to-value ranges.

The change does not impact existing homeowners and is expected to raise up to $175-million for CMHC.

For the average Canadian home buyer requiring CMHC insured financing, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment. This is not expected to have a material impact on the housing market.

The table below shows the loan to value ratio for the 15% increase.

Loan-to-Value Ratio Standard Premium (Current) Standard Premium (Effective May 1st, 2014)
Up to and including 65% 0.50% 0.60%
Up to and including 75% 0.65% 0.75%
Up to and including 80% 1.00% 1.25%
Up to and including 85% 1.75% 1.80%
Up to and including 90% 2.00% 2.40%
Up to and including 95% 2.75% 3.15%
90.01% to 95% – Non-Traditional Down Payment 2.90% 3.35%

CMHC’s new premium rates will be effective for new mortgage loan insurance requests submitted on or after May 1, 2014. In order to be eligible for the current mortgage loan insurance premiums, lenders must submit a request for mortgage loan insurance to CMHC prior to May 1, 2014, regardless of the closing date of the home purchase. As is normal practice, complete borrower and property details must be submitted to CMHC when requesting mortgage loan insurance.

Examples:

In 2013, the average CMHC insured loan at 95% loan-to-value was $248,000.

95% Loan-to-Value
Loan Amount $150,000 $250,000 $350,000 $450,000
Current Premium $4,125 $6,875 $9,625 $12,375
New Premium $4,725 $7,875 $11,025 $14,175
Additional Premium $600 $1,000 $1,400 $1,800
Increase to Monthly Mortgage Payment $3.00 $4.98 $6.99 $8.98

Based on a 5 year term @ 3.49% and a 25 year amortization

*Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.

85% Loan-to-Value
Loan Amount $150,000 $250,000 $350,000 $450,000
Current Premium $2,625 $4,375 $6,125 $7,875
New Premium $2,700 $4,500 $6,300 $8,100
Additional Premium $75 $125 $175 $225
Increase to Monthly Mortgage Payment $0.37 $0.62 $0.87 $1.12

Based on a 5 year term @ 3.49% and a 25 year amortization

*Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.

FAQ
Q: I recently have signed for a mortgage and my closing is before May 1 2014 would this affect me?
A: No, it is only if your application was submitted is after May 1st, 2014

Q: I am planning to refinance my home on or after May 1, 2014. Will the increase in premiums and surcharges affect me?
A: If the request for mortgage loan insurance is submitted to CMHC on or after May 1, 2014, the new (higher) mortgage loan insurance premiums and surcharges will apply.

Q: I am planning to buy a home in the coming months and will require a CMHC-insured mortgage.
A: If the request for mortgage loan insurance is submitted to CMHC on or after May 1, 2014, the new (higher) mortgage loan insurance premiums and surcharges will apply.

Sources:
http://www.cmhc-schl.gc.ca/en/corp/nero/nere/2014/2014-02-28-1100.cfm?WT.cg_n=TWT_MLI

http://www.cmhc.ca/en/hoficlincl/moloin/moloin_013.cfm

Author: Nilay Ertemur

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