Mortgage Insurance vs Life Insurance
There are two types of mortgage insurance (not default insurance; that compensates the lender on the borrower’s default).
- The first is typically a life insurance policy provided to a borrower by an institutional lender.
- The second is a life insurance policy provided to a borrower through a third party, such as the Mortgage Protection Plan (MPP) that is not affiliated with an institutional lender
The general consensus is that term life insurance is a better type of mortgage insurance for the borrower than mortgage creditor insurance for several reasons. However, better coverage is only applicable when the term insurance is in force. On average, only about 20% of mortgage brokers’ clients actually take mortgage creditor insurance. Quite often, this is due to the borrower indicating that he or she currently has adequate insurance or that he or she feels that mortgage insurance is not required under his or her circumstances. Since the mortgage broker is not a licensed life insurance representative he or she cannot determine whether those statements are accurate.
In addition, even if the borrower indicates that he or she will take term life insurance instead of mortgage creditor insurance, the borrower may not see a life insurance agent quickly enough to ensure that there is adequate insurance in force as soon as the mortgage begins. In many cases the borrower simply forgets or puts off seeing the life insurance agent and ends up not being properly insured.
One option to ensure that the client is properly protected is to suggest that the borrower take mortgage insurance provided by the Mortgage Protection Plan or the creditor life insurance policy and then meet with a life insurance agent at his or her convenience. While this does not address the issues noted earlier regarding the differences in coverage, it does ensure that the borrower is covered immediately. Another sound business practice is to obtain the borrower’s permission to have your insurance agent (an insurance agent that you know and trust) initiate the contact with the borrower. This reduces the potential of the borrower forgetting or neglecting to contact an insurance agent on his or her own.
Mortgage brokering in Ontario is regulated by the Financial Services Commission of Ontario (FSCO) and requires a license. To obtain a license you must first pass an accredited course. The Real Estate and Mortgage Institute of Canada Inc. (REMIC) is accredited by FSCO to provide the course. For more information please visit us at www.remic.ca/getlicensed or call us at 877-447-3642.
In addition, current legislation requires that the mortgage agent or broker mitigate risks to their clients, and in common practice this means to offer mortgage insurance to the borrower. If the borrower declines, the agent or broker should have the borrower sign a waiver declining the mortgage insurance. This will protect the agent or broker if at some point in the future there is a question as to whether mortgage insurance was ever offered. This can be especially important if a homeowner dies during the mortgage and a spouse or other survivor sues the mortgage agent or broker for not offering mortgage insurance during the application phase.
These steps are of vital importance. They will ensure that, if the borrower dies, his or her family will be adequately protected, which should be an overriding concern for every mortgage broker.
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