The ins and outs of mortgage insurance

First off, some happy news. It sounds like insurance companies are back to offering home insurance policies in our area.

This is still on a case-by-case basis and, of course, depends on the location of your home. If you are one of the people whose home purchases were put on hold over the last few weeks, I’d suggest connecting with your insurance broker today to see if they are now able to offer you a policy. I connected with the company I refer my clients to and it said Monday it has several policies in place in Kelowna.

I’ve touched on mortgage insurance before, but after a few conversations over the last two weeks, I feel it is worth revisiting.

When you are working on your mortgage, there are two types of insurance your mortgage professional will talk about (three if you include the home insurance policy you will need at closing).

The first is mortgage default insurance, which is often referred to as “CMHC insurance.” There are actually three organizations in Canada that provide this insurance—CMHC, Genworth, and Canada Guaranty.

Mortgage default insurance protects the lender in the event that the borrower defaults on their mortgage payments. That insurance is mandatory if you put down less than 20% when you buy your home.

It is a one-time premium which is added to your mortgage up front. It is calculated on a sliding scale, so the more of a down payment you have the lower your premium will be. This premium can be ported from one property to another, subject to certain criteria, which can save you thousands of dollars.

The premium protects the lender, so if your home goes into foreclosure, it does not have to absorb any loss.

The second insurance that will be discussed with your mortgage professional is mortgage protection insurance. That is commonly life and disability insurance that protects you as the borrower. Banks and brokerages offer different coverages, so it is important to understand a few key differences.

This optional insurance is generally paid monthly, and in most cases can be cancelled at any time.

In my early days, I didn’t spend much time discussing the insurance coverage we offer. At the time, we had a different product that (in my opinion) was very expensive and didn’t offer great coverage. Over the years, I’ve heard many stories about how clients’ lives have been impacted by either having, or not having, insurance coverage in place.

Within two months of each other, two of my clients had very close calls. At the same time, our firm changed the insurance product we offered. The (new) product is far more reasonably priced, is portable and flexible to meet client needs.

As a broker I must offer my clients optional life and disability insurance coverage. The product our firm offers is Manulife Protection Plan (MPP). Clients have the option of waiving all together or taking life and/or disability coverage.

Most lenders offer coverage a second time when clients either sign documents in the branch or at the lawyer’s office at the time of closing. A key difference between what we offer up front and what is offered by the lender is the portability option.

MPP can be ported from one lender to another in the event you choose to switch lenders down the road. It can also be ported from one home to the next when you sell.

Most lender products only cover this particular home and their own mortgage. If you switch or sell down the road, you will need to re-qualify based on your age at the time, which means your premiums will likely go up.

I am a firm believer in having insurance in place to protect yourself and your family in case something unfortunate happens. I am not a licensed insurance professional, so when I discuss insurance with my clients I always ask if they have coverage in place.

Part of our discussion includes my recommendation to discuss coverage with a life insurance professional as there may be products out there that are a better fit for their particular situation.

MPP insurance is free for the first sixty days, so if I have clients who plan to look into more detailed options, I suggest they opt in and cancel down the road after they’ve made the time to meet with an insurance professional. This product kicks in the from the time the application is submitted and is fully underwritten up front.

Some people have strong opinions one way or the other about the value of insurance. Based on my experience I feel strongly that it is important to review your options with a professional to ensure you are adequately protected.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.