Seventy-five percent of Canadian household’s state they would find it hard to pay off debts, such as mortgage payments, and cover everyday living expenditures if they lost their primary earner.
But things do not have to be this way. Purchasing an affordable mortgage life insurance policy ensures your family will not lose their home if you were to die with an outstanding mortgage balance.
Keep reading to find out what mortgage life insurance is and if it is worth the cost.
What is mortgage life insurance?
When you apply for a home loan, the lender is likely to pitch for an additional product — mortgage life insurance. While not mandatory, mortgage life insurance is a useful financial product since it pays off the outstanding mortgage balance on your home loan if you die unexpectedly, ensuring your family will not lose their home.
The payout at any given point in time is the same as the home loan balance. With mortgage life insurance, the policy beneficiary is always the lender. This means the death benefit will directly go to your mortgage lender upon your death.
So, is mortgage life insurance worth it?
Mortgage life insurance can be a simple and easy way to ensure your family does not lose their home if you pass on before your time. For this reason, it is worth considering if you are the primary earner, especially if an underlying health condition makes a term life insurance policy expensive or unattainable. Because mortgage life insurance does not involve underwriting, you can qualify regardless of your health and lifestyle.
Most mortgage life insurance plans kick-in only upon the policyholder’s death, but some pay a cash benefit for a specific period, such as 12 or 24 months, in the event of job loss, severe illness, or disability. Mortgage life insurance is also often called mortgage protection insurance. However, do not confuse either with mortgage default insurance — a mandatory protection you need to buy if you purchase a home with a down payment of less than 20%.
The mortgage default insurance protects the lender if you stop making mortgage payments, instead of protecting your family in the event of death. It compensates the lender for losses they incur when you default on your loan.
How does mortgage insurance work?
If you take out a mortgage life insurance policy, you will usually purchase it with your home or soon after. The mortgage life insurance plan lasts as long as your mortgage term. And the benefit amount is equivalent to the balance left on your mortgage. This means as you repay the home loan, the face value of your mortgage insurance policy reduces, although your monthly premium amount remains the same throughout.
The beneficiary of your policy is the lender, not someone you chose. Upon your passing away, the lender will issue a check, equivalent to the balance on your mortgage, to the lender. Your family will not receive a payout.
For example, say you take out a mortgage of $225,000 with an amortization period of 25 years. And to cover it, you buy a mortgage life insurance policy. So, the initial benefit of your policy will be $225,000, but it will go on diminishing as you make mortgage payments. The policy term will be the same as the number of years you have to pay off the mortgage debt (25years in this case). If you pass away during this period, the insurer will pay the lender the balance on your mortgage.
You can buy mortgage life insurance policies from your mortgage lender oran insurance company. When you purchase it from the lender, your monthly premiums can be rolled into your mortgage installments.
How much does mortgage life insurance cost?
How much you will pay for mortgage life insurance depends on two things:
- Your age
- The principal amount of your mortgage debt
Life insurance products typically cost more as you age, and mortgage life insurance is no exception. The mortgage amount is also directly related to your mortgage insurance premiums. The greater the mortgage amount, the higher the cost of coverage.
Unlike most life insurance solutions, mortgage protection insurance does not require medical underwriting. This means you will not have to worry about scheduling a medical exam or answering invasive health questions. The insurer considers neither your medical history nor lifestyle while writing you a mortgage insurance policy. Your premium rate does not change during the policy term, but the payout will decrease over time, in proportion to the balance on your mortgage.
Types of mortgage life insurance
Mortgage life insurance has a declining payout, which means the benefit amount reduces over time as you repay the mortgage. However, it is not the only option you have to cover the balance on your mortgage payments. Term life insurance is another life insurance product that helps protect your home and take care of other financial obligations, both short and long-term.
Term life insurance or mortgage life insurance
Like mortgage life insurance, a term life insurance policy provides life insurance coverage for a fixed term and pays out the death benefit if you pass away during this period. However, this is where the similarities between the two end.
Term life insurance is not tied to your mortgage balance, so you can take out as big or small a policy as you need. The benefit amount does not change throughout the life of your term plan, and you get to decide who receives the payout upon your death. Also, most term life plans, unlike mortgage protection insurance, involve a paramedical exam and health questions.
Both mortgage life insurance and term life insurance can be used to handle the mortgage payments, but these two are vastly different products. So, which one of them is better for protecting your home?
Term life insurance has some obvious advantages over mortgage protection insurance. If you qualify for a term policy, you are likely to find it a better option to cover debts, including your mortgage. However, if a health concern or dangerous lifestyle makes you ineligible for term life insurance, you may want to consider a mortgage insurance policy.
Let’s discuss the main difference between the two in greater depth.
With a term life policy, you pick the policy beneficiary or beneficiaries. They can be anyone of your choice, your spouse, children, a charitable institution, or even a pet. Your policy beneficiary is free to use the death benefit as they want.
For instance, let’s say your spouse is named the beneficiary on your policy. Upon your death, they will receive the policy amount and can spend the payout however they like. If at the time there are other pressing needs, they are free to use the money to take care of those needs instead of the mortgage.
Mortgage insurance, however, does not offer such flexibility. There can only be one beneficiary, and that is the mortgage lender. The payout can only be used to pay off the mortgage, even if that is no longer a priority for your family.
The policy term and amount
In the case of mortgage life insurance, the policy term corresponds to the amortization period and the policy amount to the mortgage balance. However, with a term life policy, you can pick a term length and policy amount that work best for you. The term period can be as short as one year or as long as 30 to 35 years, and the policy amount can be as little as$50,000 or as high as $5 million or more.
Because you can pick any term period and policy amount, a single term life insurance can meet all your family’s financial needs.Depending on the size of the payout, your loved ones can use it to pay for funeral and end-of-life medical bills, mortgage and other debts, everyday living expenses, and even future expenses, such as college tuition fees.
Mortgage life insurance, in contrast, helps your loved one sonly with the mortgage payments. If there are additional financial obligations that you need to cover, you must buy another life insurance product on top of mortgage protection insurance.
Guaranteed death benefit
Term life plans have guaranteed death benefits. In other words, the payout does not change throughout your policy’s term. The same, however, is not true for mortgage life insurance. In its case, the policy amount corresponds to the amount of money you owe to the mortgage lender and as such decreases as you repay the loan.
For most people, term life insurance is more affordable than mortgage insurance. Since it involves detailed medical underwriting, the insurer can accurately assess your overall health and the level of risk it is assuming by writing you a policy. As a result, it can set a premium rate that is appropriate for your risk profile.
In contrast, mortgage life insurance does not factor your health into pricing. So, it is generally more expensive than a comparable term life policy. If you have no underlying health condition, you are likely to get more value in a term life plan.
Having said that, in one situation mortgage life insurance can prove quite handy. If you do not qualify for a term life plan on account of poor health or dangerous lifestyle, a mortgage life insurance may be your only option to protect your home.
Advantages and disadvantages of mortgage life insurance
Mortgage life insurance gives you peace of mind knowing that your family will not lose their home even if you die before the mortgage is paid off. However, other life insurance products, particularly term life insurance, can give you the same reassurance.
Term life insurance can also give your loved ones a lot of flexibility regarding how they use the death benefit. You can pick a policy whose term and death benefit matches your mortgage. But if you have other financial responsibilities that you want to cover, like children’s higher education cost and your annual income, you can select a policy term and coverage amount that factor in these needs.
Some of the main advantages offered by mortgage life insurance are as follows:
- Let’s you skip insurance paramedical exam
You do not need to undergo a medical exam to prove insurability. Generally, you do not have to answer invasive health questions, either. Mortgage insurance can bean alternative to standard life insurance for someone with pre-existing conditions because the latter factors your health into pricing.
- Gives you the option to add riders
Many insurers allow policyholders to add living benefits or return of premiums, or both riders to their mortgage life insurance plan.
The living benefits rider allows you to receive part of the death benefit while you are still alive if you receive a terminal illness diagnosis and are expected to live fewer than 12 months. With the return of premium rider, the insurer will pay back the premium dollars paid into the policy if no claim is filed.
Note that, in most cases, you can add these riders to a term life plan as well.
Beneficial as mortgage life insurance is in certain situations, it has some drawbacks. The most notable ones are:
- It is usually costlier than term life insurance
For most people, term life insurance is cheaper compared to mortgage protection insurance.
- Decreasing payout
With mortgage protection insurance, the payout decreases in proportion to the mortgage balance. The monthly premium, however, remains the same. In contrast, a term life plan offers guaranteed death benefit.
When you purchase a house, the mortgage is likely to be your biggest financial worry. While at that time, a mortgage protection insurance policy may appear asa quick and easy solution, over time your family’s financial needs may change.Mortgage insurance, however, will not offer them any flexibility since the proceeds from the policy go directly to your mortgage lender.
- Finding online mortgage protection insurance quotes is a challenge
Most life insurance companies in Canada (if not all) do not offer online quotes for mortgage life insurance. This, in turn, makes it difficult for you to compare policies without speaking to someone.
So, is mortgage life insurance worth it?
The answer to this question depends on your financial needs and insurability. Mortgage life insurance offers an easy way to protect your home, but it has some drawbacks. Its payout decreases over time and premiums are more expensive than term life insurance, which covers all your financial needs under one policy.
So, if you qualify for a term life policy, consider it first. But if poor health or a risky lifestyle disqualifies you from term life coverage, mortgage life insurance is a viable alternative. Keep in mind it will only protect your home and handle mortgage payments — not other financial obligations.
Whether you are looking for an individual term life policy or mortgage life insurance, Dundas Life can help you secure the best coverage at the lowest possible price.
Frequently Asked Questions
1. What’s the difference between mortgage life insurance and mortgage default insurance?
Mortgage life insurance protects your family’s interest in your home. It pays off your mortgage balance upon your death, ensuring your family gets to keep the home. Mortgage default insurance, in contrast, protects the mortgage lender.
While mortgage life insurance is an optional product, mortgage default insurance is mandatory if you purchase a home in Canada with a less than 20% down payment. If you default on your loan, it compensates the lender for any losses resulting from it. For example, let’s say you take out a mortgage of $300,000 and default on it. Consequently, the mortgage lender sells the house, but because of unfavorable economic conditions, the sale fetches only $225,000. The lender will recover the shortfall — $75,000 in this case —from the mortgage default insurance policy.
2. What happens to your mortgage when you pass away?
In Canada, the mortgage is attached to the home, not the borrower. So, if you pass on, your mortgage will not be written off. Instead, the lender has the right to recover the balance from your estate.
3. How long does mortgage life insurance last?
Mortgage insurance is tied to your mortgage balance. Generally, it lasts until the amortization period of your mortgage. Term life insurance, in contrast, lasts for a specific duration picked by you at the time of purchase.
4. Is it a good idea to cancel life insurance when the mortgage is paid off?
Well, it depends on why your situation. If you have no other financial obligation besides the mortgage, you may consider terminating it when the debt is paid off. However, if you have other financial needs, like covering education costs for children, you should continue coverage.
5. How much is mortgage life insurance premium?
The cost of mortgage life insurance depends on two factors, the mortgage amount and your age.