Earlier this year, a close relative of mine (she asked that her name not be used) was going through her bank statement when she discovered a withdrawal that she didn’t recognize. As it turns out, some $30.52 was being plucked from her chequing account once a month under the description “mortgage protect/ins.”
She called the bank where her chequing account resides to find out who was withdrawing the money and learned that it was a private mortgage insurer (PMI). Indeed, these were monthly premiums for mortgage protection insurance.
All told, she’d given this company more than $700 in premiums since 2017 — the very same year she’d paid off her mortgage in full.
Mortgage protection insurance is exactly what it sounds like: insurance designed to protect the balance of your mortgage if you die or become seriously ill before paying it off. It’s a form of balance protection insurance (something that banks will often try to sell credit card holders) and it tends to rub personal finance experts the wrong way — namely because of what it’s intended to protect: the mortgage, and nothing else.
“Mortgage insurance is a bit of a cash cow,” says Glen Melynk, a financial planner with Melnyk Wealth Management. “It’s really designed to protect the lender and the debt, not yourself.”
In my relative’s case, the insurance was no longer protecting anything. She was paying for mortgage insurance when she no longer had a mortgage. One would assume that once the mortgage is paid off, these premiums would automatically stop. But when my relative got in touch with the insurer, she was told that the onus was on her to notify the company that the mortgage had been paid off and that she would no longer require the insurance. These instructions, it said, would have been in her contract when she took out the mortgage.
“That was 25 years ago,” she says. “How would I remember that?”
How does mortgage insurance work?
Banks will usually sell mortgage insurance to homeowners when they take out a mortgage in what Melnyk calls an “incidental sale.” The bank can sometimes supply the insurance itself, or it can supply the coverage via a third-party company and take a commission.
Mortgage insurance only covers the remaining balance of your mortgage. Experts see this as a major pitfall of the product, because it means that as the balance of your mortgage is paid down over time, your overall coverage decreases.
“You're paying the same amount of money for a decrease in principle,” Melnyk explains. “So if your mortgage was $300,000 to start and you get it down to $50,000 and then something happens, the insurance is only paying the $50,000 — even though all those years you’ve paid premiums that used to insure $300,000. So you're paying for a decrease in value.”
Plus, the bank advisors selling the mortgage insurance usually aren’t licenced, which means they can’t actually underwrite the policy (i.e. contractually guarantee that any payments will be made if you make a claim), or explain any of the legalities around the product.
That can create issues when you need the insurance to actually kick in.
With almost every form of insurance out there, underwriting is done at the time the policy is issued — before the event that requires coverage happens. This is called “pre-underwriting.”
In the case of life insurance, for instance, a health exam is typically required (complete with blood and urine tests) to determine eligibility and guarantee coverage later on.
Mortgage insurance, on the other hand, is post-underwritten — after the incident has already happened. So, when you’re answering questions at the bank, “You're basically just checking off boxes to see if you qualify,” says Melnyk. “Like have you visited the doctor in six months? No. Do you smoke? No. It’s done in about 30 seconds.”
Mortgage insurance is a bit of a cash cow. It’s really designed to protect the lender and the debt, not yourself
It’s almost like the bank is saying, Well, based on the answers you’ve provided today, we think you’ll qualify for a policy, but we’ll figure it out later.
“What’s concerning about post-underwriting is the insurer can turn down the policy,” says Melnyk.
For instance, let’s say that when taking out the mortgage, you check “No” on the box that asks if you’ve been to a doctor within the last six months, forgetting that you actually did go to a walk-in clinic to get antibiotics.
“You’ve now technically lied,” says Melnyk, which would void your insurance if the insurer discovers this when it’s time for the claim to be paid out.
“Those insurers reserve the right to post-underwrite,” says Melnyk, “so they’re going to look for every single thing they can, like ‘we didn’t know this’ or ‘you didn’t disclose this.’”
Alternatives to mortgage insurance
The good news is: mortgage insurance isn’t mandatory by law, so you’ve got other options. Melnyk’s recommendation, along with that of almost every other expert, is to buy a life insurance policy instead. The main benefits of having life insurance as opposed to mortgage protection insurance are that the coverage increases the longer you pay premiums for and your beneficiaries can use the money for anything.
For instance, it’s possible that the mortgage won’t be the biggest of your family’s concerns. “You might have a low interest rate, so you might want to do something else with the money,” says Melnyk. “You might want to take six months off to mourn; you may not be able to go back to work; you may want to stay home and spend more time with your kids.”
“A lot of times what may be the best financially might not be the best socially.”
In other words, mortgage insurance has to be used on that debt, but life insurance can be used on anything.
It’s not unusual, though, to get the two products mixed up. Even my relative says now that she “always confused protection insurance with life insurance on the loan.”
That’s something Melnyk says happens a lot. And it can have terrible consequences. CBC Marketplace did an investigation in 2008 into the experience of two families whose mortgage insurance claims were denied when they became sick or died.
She’d given this company more than $700 in premiums since 2017 — the very same year she’d paid off her mortgage in full
By the time people realize their misunderstanding of the product, it might be too late to qualify for a life insurance policy.
“A lot of the time people have these 20 to 30-year mortgages and they think they have life insurance but as soon as the mortgage is paid off, the insurance ends,” says Melnyk. “So now they think they better get some insurance in case something happens and then they find out they’re not eligible to because of health issues.”
If you get life insurance when you’re younger and healthier, you’re guaranteeing your future insurability.
“Once you have life insurance,” says Melnyk, “it’s there until death.”
Know what you’re signing up for
Fortunately, my relative ended up getting all of her money back. In order to get her refund, she had to give the PMI a discharge statement from the bank where she took out her mortgage — something the bank said it didn’t automatically provide her with when she paid off the mortgage because she still had an open line of credit with them.
It’s still unclear why the PMI wasn’t notified by the bank that the mortgage was paid off. The lines of communication between insurer and lender seem somewhat muddied. And my relative didn’t think to notify them because well, she sort of didn’t know they existed.
“A lot of times it’s almost like buying the extended warranty,” says Melnyk. “It’s free until this date and if you didn’t want to pay, it’s up for you to cancel and call.”
That’s why it’s crucial to learn the ins and outs of your insurance products, or you could wind up learning the hard way that they don’t always have your best interest at heart.