OTTAWA (Dow Jones)--Picture the scene: you are a proud new home buyer about to sign mortgage documents at the bank. And the bank official asks: do you want mortgage life insurance? It's an emotional moment, especially for the first-time home buyer. You are looking at what is probably going to be the biggest investment you will ever make and you are anxious to protect it. But there is an alternative to the type of coverage offered by your lender. An individually-owned plan like term life insurance offers a lot more flexibility and is often cheaper.

"If people that are taking on mortgages actually knew what their options were and these options were presented in the right fashion, they probably would purchase an individually-owned policy every time," Michael Dawson, product director of term and limited pay products at Manulife Financial Corp. (MFC) says in an interview. "Just generally speaking, when you protect your mortgage with an individually-owned plan, you're getting better overall protection and you're getting a lot more flexibility." With mortgage life insurance, you are basically part of a group policy with the lender as beneficiary. The death benefit goes directly to pay off the mortgage. But an individually-owned term life plan is yours from the start and you get to name the beneficiary. The death benefit need not necessarily be used to pay off the mortgage. People may put aside the money for a child's education or other expenses, a flexibility that isn't available with mortgage life insurance.

Premiums for individually-owned plans are typically guaranteed for life and coverage remains level. However, in mortgage life insurance, the premium remains the same but coverage decreases with every mortgage payment. So over time, it starts to get very expensive, says Dawson. Furthermore, personally-owned term insurance is fully portable, meaning that you can carry it with you if you switch mortgage providers. With mortgage life insurance, you will have to re-qualify if you switch lenders and premiums go up if you are in an older age group at the time you reapply.

Do Your Research, Seek Advice.

But Sue Usher of Bank of Nova Scotia argues that mortgage life insurance provides "real value to customers" because in most cases, first-time home buyers don't have a financial adviser. "It's individuals who haven't really taken the opportunity to step back and take a look at what their whole needs are, that would be the individual who would be most attracted to (mortgage life insurance)," Usher, who is vice-president, domestic creditor insurance, at Scotiabank's retail services and insurance department, says in an interview. She points out that numerous surveys have found that Canadians are under-insured, probably because people are buying homes at a younger age due to affordable financing. "It's a mind-set, their head is not there, their head is not at sitting down with a financial planner. So the product (mortgage life insurance) is there for them," she says.

Some people may also like the convenience factor of having mortgage and insurance payments rolled into one, says Dawson. "But if you sit down and analyze what you just purchased and compare it to personally-owned insurance, that's when it starts to fall apart," he adds. The underwriting requirements for individually-owned insurance is more thorough than for a mortgage life insurance so a person with a medical condition could potentially find it easier to get the latter coverage. "There is a chance that simply by asking the six or so questions - answering the simplified questionnaire that the lending institution would have - there is a chance that they could answer 'no' to all the questions and not have to go through any further medical," says Dawson. Some clients who purchase mortgage insurance do terminate them eventually when they review their needs after seeking professional advise. "And that's fine. It's all about what is best for the consumer at the particular point in time," says Usher.

One Ottawa-based agent for a U.S. insurer agrees that it's typically the young, first-time home buyer who tends to go for mortgage life insurance. For this group, he says it can also be less expensive than taking ownership of a policy. Nevertheless, he estimates that among his clients, at least 80% who had planned to purchase mortgage life insurance switch to term life coverage after he lays out the differences between the plans. "Unless they're getting some form of professional consultation or advice, then those people may not make the best decisions for themselves," says the agent, who declined to be identified for this story. The key then is to shop around and do the necessary research. Speak with your financial adviser if you work with one because it should really fit into your overall financial plan. Indeed, "the fact that they (home buyers) don't work with an adviser is a big mistake," says Dawson.

Web sites:
http://www.manulife.com.libaccess.lib.mcmaster.ca
http://www.scotiabank.com.libaccess.lib.mcmaster.ca

-Nirmala Menon, Dow Jones Newswires; 613-237-0668; nirmala.menon @ dowjones.com [ 01-05-07 1200ET ]

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