Mortgage Life Insurance Or Private Mortgage Insurance: Which Is Which?

Mortgage Insurance, Mortgage Life Insurance, Mortgage Protection Insurance, and Private Mortgage Insurance. What are all of these terms and do you need all of them? 20/20 Mortgage Life Insurance explains the two main types of insurance surrounding your mortgage.

There are two main types of insurance surrounding your mortgage, and each has more than one name and does different things. Mortgage Insurance generally refers to Private Mortgage Insurance or Mortgage Default Insurance, while Mortgage Life Insurance (MLI) or Mortgage Protection Insurance refers to something else.

Private Mortgage Insurance (PMI) - Think Protection for the Banks.

In Canada, when a buyer has a down payment less than 20% of the home cost, when securing a mortgage they will be required to carry mortgage insurance. Private, buyer-paid PMI is the most common. While technically the lender receives the insurance to protect against default, the cost of the premium is passed on to you, the buyer. Keep in mind that if you default and have PMI you could still end up paying because of the cost of fees, resale, etc.

PMI covers the mortgage lender against default in the case of a more risky loan. When less of the mortgage is able to be paid upfront it means the lender must issue a larger loan to someone who may not be in as good an overall financial position as someone who can pay the 20% on their down payment. This could mean the person’s overall finances aren’t as strong as the lender would like. It could also mean that while a buyer will be able to handle the mortgage on a more expensive property, they simply haven’t been able to save the down payment. Either way the lender considers this type of loan at a higher risk of default.

We’d like to stress that requiring PMI is not a bad thing. We are only presenting why it is considered a higher risk for a mortgage lender. It is not uncommon in today’s market for housing costs to go up faster than your savings account. More than half of Canadians have insured mortgages (ie they have PMI's).

Typically the PMI is folded into the monthly mortgage payment. The good news is that once the buyer pays down the mortgage to 80%, equalling if they’d been able to put down a 20% down payment, they can ask to stop paying PMI. They are now in a better financial position with the mortgage lender not to require special insurance in case of default. Typically this takes at least two years of on-time payments. Talk to your mortgage provider about these details.

Mortgage Life Insurance (MLI) - Think Protection for You The Buyer.

While mortgage protection insurance protects the lender, mortgage life insurance, on the other hand, protects the buyer. MLI is life insurance for the buyer in the amount of the mortgage balance to be paid in the event of something happening to the buyer. If something were to happen to a family’s primary breadwinner, they wouldn’t have to default on their mortgage because the remainder would be paid.

Traditionally, banks offer MLI when they sign you up for a mortgage. Bank-issued MLI policies have some issues, however, that have led to complaints about mortgage life insurance. 2020's MLI has addressed the most common complaints to offer a more accessible, worthwhile product for everyone.

Why 20/20 Is Better

Mortgage life insurance is actually a life insurance policy, the amount is simply determined by the mortgage. If you’re buying a home with a 20% down payment, you won’t be required to take PMI, but you may still want to consider MLI. With 20/20, you choose the beneficiary (banks choose themselves), it’s portable if you need to refinance or move, you decide where the funds go, and it’s accessible to people who may not be eligible for a traditional life insurance policy.

Mortgages are a fact of life for homeowners. They are a big commitment for everyone involved, the buyer and the lender. Protecting the investment from both sides makes sense, but when and why to get any insurance can be different. We hope this has cleared up some confusion, and that you’ll consider protecting your mortgage how you can, with 20/20 Mortgage Life Insurance.