Mortgage insurance a questionable deal

Iris Winston

 

The Ottawa Citizen, August 4, 2002, Final Edition, p.D2

 

Mortgage insurance may or may not offer protection for the length of the mortgage. Most insurance of this type, usually purchased through the bank providing the mortgage, collapses when the insured hits 70.

 

Not a big deal for the young couple who purchased their first home when they were under 30, took out a 25-year mortgage for $100,000 and had no reason to move. As the cost of the insurance is calculated on the age of the older of the two and this pair is young, their payment would be low -- around 11 cents per $1,000 of the mortgage each month ($11 on a $100,000 mortgage) -- and a 25-year mortgage would ,in any case, be paid off by the time they were 55 years old.

 

But for the majority of people who change houses -- upgrade, downsize, divorce, find work in another location -- staying in one house for 25 years is not an option. They can take transferable mortgages with them. They may be allowed to take the insurance on the existing mortgage with them. Or they may not.

 

Any change to a mortgage document -- refinancing or a change of address, for instance -- opens the door to collapsing the insurance agreement. Basically, purchasers are required to reapply for insurance.

 

The application may be accepted. The rate may be the same or it could go up. If, for instance, the older of the joint insured is 39, the cost, according to the table used to calculate this type of insurance, is 28 cents per $1,000 ($28 on a $100,000 mortgage).

 

The good news is that coverage would continue until a 25-year mortgage was paid off. The picture changes if one of the insured has a health condition rendering him or her uninsurable. It is possible that a "prior coverage recognition" could apply for the balance of the original $100,000 mortgage. But any amount above this would not be included in the PCR coverage. As housing costs rise, the gap widens.

 

And it gets worse. If, for example, the new house cost $300,000 and one of the owners of the previous property was 65, they would not be able to take their old insurance agreement on the earlier $100,000 mortgage with them, although the mortgage could be carried over.

 

As one of the purchasers was over 64, this couple would not be eligible for mortgage insurance. So much for dreams of moving to that high priced, adult-lifestyle bungalow and protecting the investment for one's spouse with mortgage insurance.

 

And, worse yet, the couple who purchased a home later in life would not only pay more for mortgage insurance but would automatically lose any coverage at 70. Until 1996, most banks notified clients approaching 70 that such insurance collapse was imminent. Now, notice is generally limited to the information accompanying the mortgage life insurance form, on which the list of conditions includes:

 

"Your life insurance ends on the date you reach your 70th birthday or your mortgage is discharged, refinanced or transferred to another property."

 

This is one of the reasons that insurance agent Serge Gravelle says that he does not recommend this type of insurance.

 

A second reason is that, while the monthly premium is generally locked in at the rate per $1,000 according to the age of the older insured person, the amount of the payout shrinks as the mortgage is paid down.

 

"Mortgage insurance pays a fixed amount and the coverage decreases as it follows the amount owed on the mortgage," he says. "So not only does the contract collapse at age 70 but the insured is getting less and less coverage. Then there is the portability issue. The insurance is locked into the house, not the individual."

 

A better option, in his view, is for the co-owners of a house to purchase personal life insurance and use part or all of the amount paid to the survivor on the death of the other to pay off any outstanding mortgage.

 

This is fine if the young couple bought such insurance early on. Premiums are low for the young and healthy. Older people with various health conditions pay much higher premiums.

 

At the low end of the scale, a healthy, non-smoking 69-year-old male could pay around $100 a month for $100,000 term or multi-life insurance. (His equally healthy, younger, non-smoking wife would be included on a multi-life policy.)

 

If that 69-year-old male is diagnosed with a potentially life-threatening health condition and is a smoker, the rates shoot up to as much as $500 or $600 a month for the $100,000 coverage -- if he is insurable at all.

 

At least one insurance company, Canada Life, gives smokers a three-year window to quit, charging a non-smoking rate for the first two years and continues the premium at that rate if insured smokers give up the habit for the next 12 months. If not, rates climb sharply by year four of the policy.

 

Cost of Mortgage Insurance Coverage

 

Age group Under 30 30-35 36-40 46-50 51-55 56-60 60-64

 

Single coverage $0.08 $0.13 $0.20 $0.29 $0.64 $0.82 $0.97

 

Joint coverage $0.11 $0.18 $0.41 $0.60 $0.90 $1.15 $1.36

 

(Per $1,000 of mortgage, per month)
Copyright Ottawa Citizen 2002 All Rights Reserved.

 

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