Most homebuyers in Canada don't pay for their house 100% in cash (some people do, and that's an impressive feat!) A mortgage can simplify the buying process by giving you access to capital to support your home buying process. However, mortgage brokers are likely to sell you more than just the mortgage. They might also position a mortgage life insurance product, which is grossly inferior to life insurance. It pays down the remaining mortgage debt if you pass away.
At first glance, purchasing mortgage life insurance may seem like an easy solution, as the process to buy it is pretty straight forward. After all, the last thing any prudent person would want is for their family to lose their home if you pass away.
However, mortgage insurance is a unique insurance product, with its pros and many cons. Let’s dive into more details to help you make an informed decision about whether it’s right for you and your family.
What is mortgage life insurance?
Mortgage insurance pays off your outstanding mortgage balance if you pass away. The policy proceeds go directly to the mortgage lender — not to your loved ones. While mortgage life insurance protects your loved ones if you pass away while owing mortgage payments. It also ensures your family doesn’t lose your home after you pass away.
How does mortgage life insurance work?
In the event of your death, your mortgage life insurance pays your mortgage balance. The payout amount matches the amount you owe to the mortgage lender, so it decreases over time. As you pay off your mortgage payments, the benefit amount gradually decreases. The insurance premium, however, remains the same throughout your policy term (that doesn't seem fair does it?).
The policy will last the same number of years as your mortgage. In that sense, mortgage life insurance is similar to a term life insurance policy.
Advantages of mortgage life insurance
Mortgage insurance offers three main benefits:
Easy to qualify
Mortgage protection insurance requires minimal underwriting and, consequently, is easy to qualify for.
The same, however, cannot be said about traditional life insurance. It requires a thorough review of your medical history, your family’s medical history, and often a medical exam. There are, however, policies that don't require a medical exam. If you have a serious underlying medical condition, the insurer can deny you coverage.
Mortgage life insurance, on the other hand, requires just a few screening questions. You’re likely to get coverage as long as you meet the basic criteria. This can be a desirable feature if you have a problem getting whole life insurance or term life insurance because of medical reasons.
Mortgage protection insurance is all about convenience. The payout amount lines up exactly with your mortgage balance. Plus, you can have the monthly premium rolled in with your loan payment. This way you can cover both the mortgage loan and mortgage life insurance with just one monthly payment. Many mortgage insurance products that are offered up by the big banks and credit unions sometimes require less than a couple of pages of paperwork to get access to the product.
Furthermore, if you refinance your existing mortgage loan with the same financial institution, you will be able to keep the coverage, even if your health has worsened since you initially applied.
Mortgage life insurance can supplement a whole life or term life insurance policy. For instance, if your mortgage debt is paid off by a mortgage protection insurance policy, your family can use the proceeds of any other policies to cover their personal expenses.
Disadvantages of mortgage life insurance
While mortgage protection insurance is beneficial in certain situations, it has glaring drawbacks.:
The payout goes to the lender
The lender — not your family — is the beneficiary of your mortgage life insurance policy. So, when you pass away, it's the bank, not your family that receives the policy proceeds. Of course, your family benefits because they no longer need to worry about keeping up with the mortgage, but they could still be left with bills they can’t afford.
In the case of a term or whole life policy, your family can choose how they want to use the payout. They can use the funds for the most pressing bills, be it mortgage payments, college tuition fees, or other loans.
Mortgage protection insurance, by contrast, locks your loved ones into paying down the mortgage, even if there are other bills that are more urgent.
More expensive than term life insurance
If you want to ensure your family keeps the house after your death, term life insurance is one option worth considering. A term life policy will pay your loved ones a fixed lump sum. They can then use that payout to pay the mortgage off. All things equal, term life insurance comes out cheaper than mortgage protection insurance.
For comparison, here are sample mortgage life and term life insurance rates:
|Age||Gender||$600,000 of mortgage life insurance||$600,000 of term life insurance|
Assumes a health individual looking for 20-year term coverage. Term life insurance rates are with Empire Life insurance, which is offered by Dundas Life.
The payout isn’t fixed
The payout amount keeps decreasing as you repay the mortgage, even though the policy premium stays the same.
Is mortgage insurance different from mortgage life insurance?
Yes, they are two different things.
You require mortgage insurance (often called mortgage default insurance) if you pay less than 20% of the home’s purchase price. It protects the lender in case you stop making mortgage payments. A mortgage insurance policy will pay the lender a portion of the principal if you default on the loan.
In contrast, mortgage life insurance pays your mortgage debt in the event of your death.
Is mortgage life insurance different from CMHC insurance?
Yes, it is.
Canada Mortgage and Housing Corporation (CMHC) exclusively offers mortgage loan insurance in Canada. You require CMHC insurance if your down payment is less than 20%. This insurance product protects the lender in case you default on repaying your mortgage loan.
How much does mortgage life insurance cost?
The cost of mortgage life insurance depends on many factors. These include:
- Age: Like other life insurance products, mortgage life insurance becomes more expensive as you age.
- Coverage amount: The greater the coverage amount, the higher the premium payments. So, a policy with an initial payout of $250,000 will be more expensive than one with a $100,000 payout.
- Term length: The greater the term length, the more you will pay for coverage.
- Health: Those in good health are likely to receive favourable rates from insurance companies.
- Smokers: Smokers pay more for coverage than non-smokers.
What is the best mortgage insurance in Canada?
Locating the best mortgage insurance company in Canada is easy when you have experts guiding you. Dundas Life partners with leading insurance companies in Canada. You can count on us to provide you with lots of options when you are shopping for mortgage life insurance.
Let’s be honest. No single life insurance company is the best for everyone. However, an independent broker like Dundas Life can help you pick a provider that’s perfect for unique needs.
We can help you buy a mortgage life insurance policy from Canada Life, BMO, Sun Life Financial, RBC Insurance, Manulife, and more.
Is mortgage life insurance worth it?
Mortgage life insurance helps you protect your home financially and doesn’t include a medical exam. But it lacks the affordability and flexibility of term life insurance.
If you are in poor health and don’t qualify for individual life insurance, it allows your family to keep your home after you pass away.
In almost every other case, term life insurance is the better option. The policy benefits will go to your family — not the lender. And they can use the money as they see fit (including paying off the mortgage).
Is mortgage life insurance mandatory?
No, it is not. But it’s a good option in certain situations. For instance, let’s say you take out a mortgage of $200,000. Because of underlying medical conditions, you cannot get individual life insurance. You want your family to be able to keep the home after you pass away. A mortgage life insurance policy can help ensure that. It will pay the loan if you die.
Can I cancel my mortgage life insurance?
Of course, you can. You can cancel a mortgage life insurance policy any time you want. You won’t get any of the premium dollars you’ve paid into the policy. Though you can often replace it with a more comprehensive (and cheaper) term life insurance policy.