By Carola Vyhnak
Moneyville

If no one mentioned it during the course of financing your new home, the term “mortgage insurance” could be an unwelcome surprise that stretches a tight budget even tighter.

But it also comes strongly recommended, because it protects your investment if you die. Industry expert Yousry Bissada calls it “peace of mind for the family.”

If something happens to you, the mortgage is paid and your family won’t be out on the street.

Many homebuyers, especially first-timers, are already reeling from the myriad tasks and decisions to worry about with insurance.

“Pretty much everything is brand new,” sympathizes Cobourg realtor Dale Bryant. “There’s so much to think about and do. But after all that, you want to protect your home.”

Here’s how mortgage insurance works: You purchase a policy for the amount you owe on your home, and, if you die, the insurer pays off the mortgage lender. The coverage is optional.

(This insurance is different from high ratio default insurance required if you have less than a 20 per cent down payment. This insurance is underwritten by the Canada Mortgage and Housing corp. or Genworth Financial.)

Here’s where things get complicated, starting with the terms “mortgage insurance,” “mortgage life insurance” and “creditor insurance,” which all mean the same thing. You can buy that coverage from the financial institution that’s lending you the mortgage money. The premiums are usually tacked on to your mortgage payments.

But you can, instead, buy term life insurance for the amount of the mortgage from an insurance broker or agent. Either way, your mortgage is paid off if you die. But there are significant differences between the two options.

Mortgage insurance from a bank or other lender could cost much more than a term life policy, depending on your health and age. As an example, the premium on a $250,000 mortgage for a couple aged 35 would be about $52 a month while 10-year term life insurance for the same face value would be about half that, according to a comparison on Kanetix, an online marketplace for insurance and financial products.

The premiums on mortgage insurance stay the same throughout the term (five years, for example), but the payout, if there is one, shrinks with the mortgage. Each time you renew your mortgage or switch lenders, you have to renew your policy.

With term life insurance, which typically covers you for 10, 20 or 30 years, the amount of money that’s paid out to the beneficiary never changes, although premiums do when you renew for another term. If you have an existing policy, coverage can be boosted to include your mortgage debt. Your family can then decide whether to pay it off or use the money some other way if you die early.

Mortgage insurance provided through the bank is quick and easy to arrange, and, typically, only requires answering a few health-related questions. Buying a term life insurance policy, on the other hand, is a longer process that involves delving into your medical history.

All this means there are many factors to consider in deciding on the best way to protect your home.

Dale Bryant, an accredited mortgage professional, urges people to shop around. “Look at the whole picture,” he advises, noting that everyone’s circumstances, living costs and insurance needs are different.

Yousry Bissada, president and CEO of Kanetix, suggests home buyers use his company’s website to compare insurance costs.

“There are many options out there,” says Bissada, who has a mortgage and banking background. “A person has to shop and get what they need for them.”

Insurance facts

Mortgage insurance and term life insurance serve the same purpose but there are key differences:

• Cost: Premiums on mortgage insurance are typically higher than on term life insurance.

• Convenience: Insurance through your lender can usually be arranged quickly and easily when you sign your mortgage papers. Term life insurance involves more time and effort.

• Portability: If you change lenders or sell and buy a new home, you’ll have to apply for a new mortgage insurance policy. Term life insurance, however, stays with you.

• Payout: With bank insurance, the amount of coverage and subsequent payout if you die decreases with your mortgage balance. But the amount of term life insurance stays the same throughout its term.

• Flexibility: The bank is the beneficiary with mortgage insurance, whereas term life insurance, which you own and control, allows you to name your beneficiaries, who can then decide what to do with the money.