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Deciphering the Insurance Puzzle – I (CMHC, Mortgage Life, and Term Life)

One aspect of personal finance that is often overlooked is insurance.  It’s often viewed as a product that is not needed, confusing, and/or simply expensive.  My view is that there are some insurances that are essential to have, and perhaps even a foundation of personal fiscal health.  This post originated from an email received by a reader who is confused about all the insurances offered and wanted a brief summary on the offering and the essentials.

CMHC Mortgage Insurance

For home owners out there, it is more than likely that you were required to pay the CMHC fee with your first mortgage.  The term “insurance” in this case can be deceiving as it does nothing to insure the home buyer.  This fee, infact, insures the bank against default on payments, except that the home buyer pays the fee.  Pretty good deal for the bank hey?  As I’m not a fan of fees, I typically try to put down at least 20% when purchasing real estate to avoid CMHC altogether.

Mortgage Life Insurance

This is an insurance that your mortgage agent may offer that will cover your mortgage balance in the case of death.  The premiums are normally fairly reasonable for this insurance, but often very close in cost to term life insurance.

I avoid this insurance for many reasons, one of them being is that it’s a declining balance insurance.   That is, as you pay down your mortgage, the coverage decreases, but the payments remain the same. As well, it’s the lender who is really the beneficiary, whereas with term life, the payout goes out to the named beneficiary.  Finally, and perhaps most importantly, mortgage life insurance is typically a “post-claim” insurance which means that it’s not underwritten until a claim is made.  In other words, the insurance company can deny the claim if they determine during their investigation that a health issue was not declared when the mortgage initiated.  In my opinion, you’re better off going with a term life policy to cover the mortgage amount.

Term Life Insurance

You know how the saying goes, “buy term and invest the rest”.  Term life insurance is a lower cost life insurance option that covers the policy holder for a pre determined amount for various lengths of time in the case of death.  It’s basically the no-frills of insurance options, and the one I personally use.  The premiums (cost) of the insurance depends on your age, health, coverage and the term.  I’m a believer of working towards becoming self insured which is when your income producing assets are enough to cover expenses and/or debt, which is why I buy term and invest the rest.  Term life is one of those “must have” insurances IF you have dependents.  How much do you need?  This is how I calculated my term life requirements.

One more tip, when you do get term life, make sure that it’s renewable and convertible.  That way, if the term is up, and you still want coverage, you can renew with less hassle.  Here is a FREE e-book that I found that explains the basics of life and living benefits insurance.  It’s written by an insurance firm, so the content is a bit sales like, but there is some good stuff in there (like the section on how insurance agents are compensated).

I’ll continue this article in Part 2 tomorrow!

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 19 comments… add one }
  • Daniel July 19, 2010, 11:38 am

    One fact you failed to mention on the Mortgage Insurance as well is that it is not portable. If you decide to change mortgage provider or even renew your current mortgage, your insurability with the new provider or new mortgage agreement is not guaranteed.

  • No Debt Guy July 19, 2010, 12:06 pm

    It depends more on the lender than the insurer. As far as I know all insurers let you port your mortgage.

    http://www.cmhc-schl.gc.ca/en/corp/faq/faq_006.cfm#10

    If you are unable to move or renew your mortgage at a different lender it may be possible that you no longer qualify. The insurance shouldn’t make a difference. Unless of course you are moving to a lender that does not work with a certain insurer.

  • Heather July 19, 2010, 12:31 pm

    Thanks for the interesting post. I would also be very interested to hear your thoughts on Critical Illness Insurance once you finish this post.

    Thanks for a great blog!

  • Jenna July 19, 2010, 1:19 pm

    Excited to see what insurance you talk about next. Question: Is putting 20% the only way to avoid CMHC?

  • No Debt Guy July 19, 2010, 1:32 pm

    Hi Jenna,

    Yes, putting down 20% is the only way to avoid the CMHC fees.

    Although having 20% down is ideal homes can be purchased with 5% down. You have to look at the whole picture with your finances and housing requirement to decide if this is right for you.

  • Jenna July 19, 2010, 3:22 pm

    Hi No Debt Guy,

    Thanks for the info. Aiming for 20% – let’s hope that happens :)

  • MS Save Money July 19, 2010, 6:20 pm

    I’ve heard about mortgage life insurance but I never really understood how it worked. From hearing that it’s a declining insurance, I wouldn’t be too excited on purchasing this plan. I wonder how many people actually buy it.

  • Cheap Insurance Guru July 19, 2010, 10:21 pm

    Thanks for a great blog – looking forward to part two. Many people understand mortgage insurance and term life insurance, but (as others have commented) “Mortgage Life Insurance” is a bit confusing for most folks.

  • Multiple Egg Baskets July 19, 2010, 11:56 pm

    I was fortunate enough to have the required 20% down on my latest purchase in order to avoid CMHC fees. The additional funds would have greatly impacted the bottom line. This should be part of your estimates when determining your housing costs and your general budget each year.

  • TC July 20, 2010, 12:55 pm

    Manulife One has a declining monthly premium (assuming the motgage balance declines monthly) with their Mortgage Insurance product. As your balance declines so does your Monthly permium. Premiums are calculated based on the outstanding month-end balance of your Manulife One account and they will vary based on your age and the account balance.

    • FT FrugalTrader July 20, 2010, 1:01 pm

      TC, do they do the underwriting during the application or when there is an incident?

  • Mike July 20, 2010, 5:20 pm

    CMHC insurance in particular drives me nuts. There is absolutely no consideration of the person’s ability to pay, and it is without any kind of term. Even if you sold your house the very next day or paid off the mortgage in full there is no refund on the $1,000’s of dollars you have just spent!

  • Tommy July 21, 2010, 12:46 pm

    CMHC is pretty much government’s “insurance policy” against high-ratio mortgages. Personally I would rather see an increase of down payment requirement instead of an “insurance”.

    For a short period during 2006 (I believe), a person can put as little as ZERO down payment o purchase a property. That was a suicidal move from our government as if our real estate was not over-heated already?

    Then the gov’t increased to 5% down payment, which is essentially 100% financing when you factor in CMHC fee and extended amortization from 25 to 35 years!

    I would rather see gov’t increase downpayment to 10%. Realistically, this will ensure that those who can afford being a home-owner is responsible enough to continue with payments during good times and bad times. With 5% down, a person can easily walk away when property value drops (or when it drops.. it just seems like real estate in Vancouver NEVER drops!). This is what happens in the States when speculators and home owners see their mortgage balance > market value by what.. 10, 20, 30%?

    ie. If I own a house with a mortgage of 500K, and the property value is only worth $300K, I may be tempted to walk away and declare bankrupcy to save myself 200K when I don’t even have a job!

    Lower interest rate + low down payment + gov’t backing the loans/mortgages + over-build = housing crisis in the making!

    PS: Personally, I would love to see Vancouver housing drips 15%+… so I can finally afford to buy a nice condo down there… lol Boi, Vancouver is so desirable, but so out of reach for many Canadian home owners!

  • TC July 22, 2010, 10:00 am

    FT,

    They have a simple application process for mortgages up to $250,000 that consists of as few as three medical questions (in some cases, additional details may be required). Amounts in excess of $250,000 requires more detailed underwriting

  • novatedlease calculator July 23, 2010, 9:08 pm

    This article was excitingly interesting. Dealing with insurance always be a headache especially in the phase of choosing the best one. As soon as you have chosen still the process continuous to be our concern. It will always be our great passion to look after our insurances maybe because of the money involved and the benefits that are stake. We always have anted that our choice have the most worth of our money.

  • Manas December 3, 2011, 9:09 pm

    I have a question on CMHC Fee. Say my House price is $500,000 and I downpay 10% – so my CMHC Fee is 2% of $450,000 i.e. $9000. If my Mortgage is for 25 Yrs and my Term is 5 Yrs, what happens after the Term (ie after 5 Yrs) ? Is my CHMC Fee all paid in the Term or it continues till Ammortization ? When I take another mortgage on the remaining balance after 5 Yrs, do I have to pay new CMHC Fees again, assuming I downpay less than 20% ?

  • No Debt Guy December 4, 2011, 1:31 pm

    As long as you don’t refinance or want to extend your amorization you only pay the CMHC premium once.

    If you don’t pay it out of your pocket when you get the mortgage and instead have it added to the mortgage amount you are techincally paying a little piece of it with every mortgage payment until your mortgage is fully paid off.

  • Manas December 4, 2011, 8:30 pm

    Thanks Mr. FrugalTrader and Mr. No Debt Guy, apart from your responses, I liked your usernames as well :).

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