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Mortgage Insurance of Life Insurance - EP: 119
Episode 11917th April 2020 • Bo Knows Real Estate • Bo Kauffmann - REALTOR
00:00:00 00:09:50

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When buying a house or condo, should you take the mortgage insurance offered by your lender, or should you opt for life insurance instead?

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[00:00:00] Mortgage insurance or life insurance? What's the difference? Let's find out right now. [00:00:04][4.1]

[00:00:08] You're listening to the Bo Knows Real Estate Podcast tips and advice for home buyers, sellers and owners with award winning Remax agent Bo Kauffmann. [00:00:18][10.2]

[00:00:23] Today, we'll look at the difference between mortgage insurance and life insurance. This has nothing to do with the property itself. Property insurance or CMHC kind of mortgage and housing. If you're buying a house and putting less than 20 percent down, you need to get CMHC. That's not what we're talking about. What we're talking about today is a bank offering product called mortgage insurance. And how does it compare to a personal or a life insurance? Let's let's discuss. [00:00:50][26.3]

[00:00:51] All right. So I'm here with Thomas Johnson, financial adviser for Cascade Financial. And we're going to discuss the differences between mortgage insurance and what I call life insurance. He calls it personal insurance. So here we go. Thomas, welcome. [00:01:03][12.6]

[00:01:04] Thank you Bo. [00:01:04][0.3]

[00:01:05] OK. So why don't you tell us a little bit about what a mortgage insurance is? [00:01:08][3.8]

[00:01:09] More insurance really is at its core, it's always a life insurance policy. And then there's usually one extra insurance type that you can add onto it that needed disability insurance. Critical illness or loss of employment. It's the kind of thing that comes standard when you go into a bank or when you deal with a mortgage broker. It's a requirement. It's something they have to offer to you as part of the lending deal. Just because the federal government realizes the importance of having mortgages insured against death, disability or illness. So that's what mortgage insurance is in a nutshell. [00:01:41][31.9]

[00:01:42] So they have to offer it. But the consumer, the homeowner does not have to buy it? [00:01:46][4.0]

[00:01:46] No, it is 100 percent electable, and that's a common misconception. A lot of people think they have to take the insurance to get the get the mortgage. But it is 100 percent elective and you still have to apply and qualify. [00:01:58][11.8]

[00:01:59] So what are some of the advantages of using mortgage insurance? [00:02:01][2.3]

[00:02:02] Really, there's only two that I can think of. The first thing is that it's simple and easy to apply for because you're already at a desk. You are already there with your mortgage broker and a banker. The papers are right in front of you and it doesn't require separate meeting. Somebody like me makes it easy. And then also it's easier to apply for. And I ask, is that just because they only asked a handful of questions, you may face three, four or five questions, basically. Are you a smoker? Yes or no? And are you suffering any serious health problems? Yes or no? And if you answer no to the second one, then will you get a policy in your hands? But the actress will talk about in a little bit. It doesn't necessarily mean that you are going to be covered. [00:02:41][39.0]

[00:02:42] Right. And actually, we'll get right into that right now, because that's one of the drawbacks of the mortgage insurance, as I understand it. [00:02:48][5.5]

[00:02:48] Absolutely. There's there's a number of drawbacks. The biggest one and the big killer for me is really that you are often not insured or guaranteed to be insured simply because the underwriter doesn't look at it until the time of claim. So the point came when you were diagnosed with cancer at that point in time when you were hurt and unable to work. The point can we passed away? You can no longer defend yourself. That's the point in time, somebody actually looks at your case and decides whether or not you would be covered. So in a nightmare scenario, you've got a widow or a widower who now has to go battle an insurance company over a claim paid for for their mortgage insurance after their spouse is long gone because it's now being reviewed at that point in time. [00:03:28][39.5]

[00:03:28] OK, so just to be clear, because this really blows my mind sometimes. I've heard this before. So had a friend who went through this with his mother had mortgage insurance. She was a widow. She passed away. And my friends, family end up fighting the bank to get the payoff. So just because you dutifully paid into it for years doesn't mean you're going to get the payout when you expect it, correct? [00:03:50][21.8]

[00:03:51] It is not guaranteed. You are paying the premiums. And the only point in time when you find out whether or not you're actually covered is the time when you need it the most. [00:03:59][8.3]

[00:04:00] OK, so let's assume that, you know, for whatever reason, they deny your claim to go your benefit. Do you get all your payments back? [00:04:06][6.0]

[00:04:07] They're usually obligated to pay back what premiums you paid into it. So that's the minimum amount that you'll get back for the life insurance side of things. If it's a disability claim and you deny it doesn't mean you get your money back. [00:04:18][11.4]

[00:04:20] So when you're at your worst, when your spouse has passed away, that's when you've got to try and figure out whether or not you're going to get the money or not. [00:04:27][7.4]

[00:04:27] Exactly. When we return, we'll talk about an alternative to mortgage insurance. [00:04:31][3.9]

[00:04:35] You're listening to Bo Kauffmann of RE/MAX performance realty. If you're enjoying the show, please subscribe so that you never miss an episode. Bo knows real estate. [00:04:45][10.0]

[00:04:50] So let's talk about a little bit about the alternative. What other options are there for basically personal insurance? [00:04:56][5.7]

[00:04:57] In this alternative you come in, you see somebody who's a licensed insurance adviser like myself. They walk through all the options available in the market and you get to pick and choose that type of plan that works best for you. So if you want life insurance, you take life insurance. If you don't, you don't. If you want disability, you can take it. If you want critical illness, you can take it totally up to you and how you customize it. It can be built around your overall financial plan. So if you want more than just enough insurance to pay off your mortgage, if you want enough to cover off your car loan, if you want to pay for your kid's school, if you want to provide for your spouse so they have time to grieve. If he might have estate taxes, you can build a policy or policies that fit that entire goal instead of just being pigeonholed into the mortgage window. [00:05:37][40.4]

[00:05:38] Actually, I just remembered something else, too. With mortgage insurance, the first kind, if you pass away and if they do pay out, who gets that money? [00:05:46][8.5]

[00:05:47] The bank gets the money. The payout is always described as the exact amount to pay off the bank. The money goes straight to the bank and the mortgage is now free and clear. When it's a personal insurance policy, on the other hand, the money goes to your beneficiary. They can choose to pay off the mortgage or not, and they always get the exact face amount on the policy. So if you've paid off a hundred thousand dollars on your mortgage balance, you've now created a hundred thousand dollars more for your state. Whereas if you paid off a hundred thousand dollars and you got the mortgage insurance, it just means insurance companies on the hook for less money to the bank. [00:06:16][29.3]

[00:06:17] Right. OK. And with personal insurance, as you said, you get the money, you decide what to do with it. So if you have no mortgage or if you have a low interest mortgage, you may decide to keep that and use that money to pay off other higher debts or higher. [00:06:30][13.2]

[00:06:31] Exactly. You can invest it. You can pay off loans. It's the beneficiaries money to do what they want with. [00:06:35][4.7]

[00:06:36] Now, having said all of it, it sounds like and I've done enough research on it to know that I believe that personal insurance or life insurance is a better vehicle. It's got to be more expensive though, mortgage insurance. [00:06:47][11.0]

[00:06:48] And that is the weird thing about it is personal insurance is one of those rare, rare things where the better product is actually the cheaper product. Case in point, I've got a couple and working with right now. We he had mortgage insurance to cover just under $400000 to the mortgage. It was costing them $70 a month just for him. I got them both. Five hundred thousand dollars of mortgage on both him and her for the exact same $70 a month. It's a longer term. It's a level payo. It's not decreasing and it's underwritten upfront. So there's no contestability over whether or not somebody has passed away and there's going to be appealed. It is set in stone. [00:07:24][36.6]

[00:07:25] So they're both covered for roughly the same price as one of them under mortgage insurance with higher coverage amount. With higher coverage amount. OK. All right. So from what I see, the biggest disadvantage is that people to get personal insurance. It's an extra step for somebody to go through. [00:07:39][14.2]

[00:07:40] Exactly. They basically have to come to my office. We have a meeting. It's usually somewhere between half an hour to an hour. We put in an application to go through a questionnaire because it is person insurance in the event that they are applying for a certain dollar amount or if they have a riskier health history, they may be required to see a nurse. That nurse will take blood, make them a cup, blood pressure, that sort of thing. And those results get sent off to an underwriter and it can take a couple weeks to get a decision back as far as mortgage insurance that comes from the bank. [00:08:08][28.1]

[00:08:08] People able to cancel it after a year. [00:08:10][1.6]

[00:08:11] They can cancel it at any point in time. There's no requirement they hold onto it for a certain period of time. There's no fee for canceling basically be canceled in the first three months. The person sold it. Few gets charged money for canceling early, but there's no fee to you as the as a consumer. [00:08:24][13.9]

[00:08:25] OK. And if you get personal insurance, if you want to increase or decrease it at some point down the road, you can always decrease it. [00:08:32][6.9]

[00:08:32] No questions asked. However, we do want to increase it, get more coverage down the road. You even need to buy a rider up front that allows you to do so, or you can come back and apply for new insurance. [00:08:41][9.0]

[00:08:43] And where do people get a hold of you if they want to? [00:08:46][2.7]

[00:08:47] You can find me online at w w w dot karski financial group dot com. You can call me at 2 0 4 8 3 7 1 9 6 0. Or you can come by my office and say hi at 1730 Corydon Avenue. [00:08:59][12.0]

[00:09:00] Well, thank you very much. It's been very enlightening. [00:09:01][0.9]

[00:09:02] Thanks for having me, Bo. [00:09:03][0.5]

[00:09:04] And hey, if you're still with me at this point. Why not grab my free podcasting app available for IOSs and Android devices? It's super easy. Just go to Winnipeg, dot tips, slash Apple or slash Android. That's Winnipeg dot t i p s slash apple or slash android. That way you'll never miss another episode about Winnipeg real estate or both. [00:09:27][22.4]

[00:09:31] You've been listening to Bo Kauffmann of RE/MAX performance realty, are you thinking of buying or selling a house or a condo in Winnipeg called Bo at 2 0 4 3 3 3 2 2 0 2? [00:09:43][12.2]

[00:09:44] Remember, Bo knows real estate. [00:09:44][0.0]