Q: I am a single, 70-year-old with a reasonable mortgage of $115,000. I have no family and no dependants. I find that the life insurance on my mortgage is too expensive. Do I need mortgage life insurance anyway? What for?—Katerina
A: I’m glad that you noticed the life insurance you’re paying on your mortgage, Katerina. Many people don’t even know if their mortgage is insured or not in the first place. Click on your mortgage when online banking or check your most recent mortgage statement and you will most likely notice a reference to your mortgage being protected or insured or potentially not protected or not insured.
This insurance coverage is typically a combination of life insurance and disability insurance. In the event of death, the life insurance component of the policy pays off the outstanding mortgage. In the event of disability, the disability insurance component of the policy makes your regular payments.
Banks are prohibited from selling most types of insurance in their branches other than life and disability insurance on credit products. The Canadian government has purposely done this to encourage competition in the insurance industry (primarily to ensure low premiums) as well as to avoid tied selling (needing to buy insurance in order to get approved for a mortgage).
When you sign the multitude of papers the bank puts in front of you to get a mortgage, the financial adviser may ask you to initial a document to either insure or not insure your mortgage. My guess, Katerina, is that you initialed that “yes,” you wanted mortgage life insurance, also known as mortgage protection insurance.
A number of years back, I got a mortgage and specifically opted out of mortgage life insurance. Not long after, I realized that my mortgage was “protected” with mortgage insurance that I had said no to in the first place. So sometimes, you end up with mortgage life insurance even when you don’t want it!
Katerina, mortgage life insurance is more expensive than most group or individual insurance coverage. So you’re probably right—it is likely pretty expensive compared to other insurance alternatives.
Sometimes mortgage life insurance is a good idea. For example, if you have a condition or illness that might make it difficult or impossible to get life or disability insurance separate from your mortgage.
But for you to have insurance when you are retired and don’t have any beneficiaries, Katerina, is questionable. I’d say that most average Canadians should be considering insurance solely as a risk management tool. That is, if there is a financial risk of you becoming disabled or dying either to you being able to provide for yourself or for your beneficiaries financially, you should consider insurance.
If you die, Katerina, with no family and no beneficiaries, the insurance serves only to provide a larger estate for you to leave to friends or charities. I’d say the cost of you incurring expensive insurance premiums at the age of 70 on an expensive mortgage life insurance policy is not even remotely appropriate.
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Mortgage life insurance is profitable for banks. And it’s profitable for the financial advisers who get you to buy it. They’re often bonused on making sales like mortgage life insurance.
Financial advisers are not fiduciaries. In fact, they’re sometimes not even financial advisers because they’re not really advising you on your finances. Most financial advisers are salespeople who work for a company and get paid to sell stuff. In this case, a financial adviser who is paid to sell things like mortgage life insurance got you to buy something that you don’t need. And because they’re not a fiduciary and don’t need to put your interests before their own, there’s nothing legally wrong with what they did—just morally wrong.
The financial industry is awash with questionable morals. I’d say this is an unfortunate case of someone putting their own financial interests ahead of yours. I’d also say that the bank is at fault for not having appropriate compliance oversight to question why a single, 70-year-old with no family or beneficiaries would benefit from mortgage life insurance.
I don’t like knocking the financial industry publicly, because it contributes to the distrust that exists of financial advisers. This distrust makes me reluctant to tell people what I do for a living for fear of being “just another financial adviser.” But maybe if enough people raise enough of a fuss in cases like this, consumers, companies, regulators and governments might help to ensure that financial advisers start to advise people on their finances instead of opting to line their own pockets.
PLEASE NOTE: Mortgage life insurance may sometimes be expensive compared to other alternatives, but that doesn’t mean you should go cancelling your mortgage life insurance after reading this article. First you should determine, potentially with the help of a professional, if you need insurance and how much. Then consider your alternatives. And before cancelling any insurance policy, make you that, if you need insurance, you already have a replacement policy in place.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products.