Unfortunately, the mortgage insurance you purchase from the banks is very different to what you may be used to with a regular insurance policy.  Mortgage insurance is upsold by financial institutions to pay off your mortgage balance in the event of a death and the beneficiary is the bank not the mortgagor.  These funds are used to pay out and discharge the mortgage balance at the time of death, regardless of the amount that you started with.  The cost of this insurance is always based on the original mortgage amount and added onto your monthly mortgage payments to make it more convenient.

Mortgage insurance is a major source of revenue for the banks.  The bank insurance is very easy to acquire for the average person but remember the bank is the beneficiary not you.  The insurance is to pay off your outstanding mortgage amount at the time of your death.  So, if you took out a mortgage for $400,000 and the premiums were based on this amount, but you died when the mortgage balance was $150,000, the insurance will only pay off the $150,000 outstanding balance.

Christine’s Tip:

Most people opt for mortgage insurance when they first get a mortgage since it is very easy to acquire.  There is no medical exam required, and you usually only have a few questions to answer truthfully at the time of application.  But for all its conveniences, mortgage insurance that you purchase through your financial institution, still has many drawbacks.  When your mortgage is paid off or if you move to another lender, or sell your home, your coverage ceases.

An alternative to mortgage insurance would be to get a term life insurance policy for the amount of your mortgage.  This is less expensive than permanent life insurance, so it is easy to afford additional coverage for a set period of time during your prime working years.  Payments are always locked in and will not change during the term you have chosen.  It’s a good idea to choose a 20-year term to lock in a lower premium for a longer time frame.  You can cancel it at any time, or you can convert your policy to permanent life insurance, usually without having to re-qualify.