While a standard term life policy can help your loved ones to pay off your home, there’s a special type of life insurance that’s tied to your mortgage.
Let’s discuss the ins and outs of mortgage protection insurance to see if it’s right for you.
What is mortgage protection insurance?
Mortgage protection insurance is a type of life insurance product that pays off your mortgage if you pass away before the house is paid off. In short, it helps your family keep the home after you’re gone.
One of the primary features of mortgage protection insurance is that the lender, not your family, is the beneficiary of your policy. Upon your death, the lender receives the payout, which equals the balance on your mortgage at any point in time.
Some policies also cover your mortgage payments if you fall seriously ill, become disabled, or lose your job. Typically, these policies take care of monthly mortgage payments for a limited period, say one or two years.
For example, say you purchase a home for $500,000. You put down 10% of the home’s purchase price and the amortization period is 20 years. To keep things simple, let’s assume the total mortgage balance is $450,000.
If something were to happen to you during this period, the mortgage lender will still need to collect on the mortgage payments. Your family may have to dip into their savings to pay the monthly payments or risk foreclosure. Either way, this can result in financial hardship.
You can make things easier for your loved ones by taking a policy. If you die before clearing the mortgage debt, your policy pays off the outstanding balance to the lender.
Is mortgage protection insurance the same as mortgage insurance?
Yes, it is. Mortgage protection insurance is also known as mortgage life insurance.
How much does mortgage insurance cost?
The cost of mortgage insurance in Canada depends on many factors. Individual factors, like your age, and policy-specific factors, like the death benefit amount, impact your rates. It pays to shop around, and you can count on Dundas Life to help you find the best rate.
Prices might differ based on personal debt ratios.
Advantages of mortgage protection insurance
The policy payout matches your mortgage balance
Typical life insurance policies pay the death benefit amount to your family. If your loved ones receive a big lump sum, they might find it difficult to properly allocate it.
With mortgage protection insurance, however, your loved ones won’t have to worry about whether there would be enough money to cover the balance on the mortgage.
The proceeds of the policy go directly to the mortgage lender and cover exactly your outstanding balance. If you pass away, your mortgage life insurance policy will make monthly payments to the mortgage lender until the mortgage loan gets paid off.
Most life insurance policies require you to complete a medical exam. If you have a serious illness, you might get turned down. Critical illness insurance might be an alternative in this case. Since mortgage insurance doesn’t involve a physical, you can get insurance coverage even with an underlying condition.
A mortgage is likely to be the biggest debt you’ll ever take in your life.
Before you sign up for it, you may want to ask: “If I were to sustain an injury that prevents me from working, would I be able to pay monthly mortgage payments with the money in my emergency fund for three months, six months, a year or even longer?”
If the answer is no, a mortgage insurance policy may be right for you. Some policies cover payments — for a limited period — if you lose your job or become disabled. Alternatively, you can consider disability insurance. Disability insurance will definitely cover you in case you become disabled.
Disadvantages of mortgage protection insurance
As useful as mortgage protection insurance is, it may not be the best way to pay off the outstanding mortgage balance if you pass away.
You can’t select the beneficiary
Mortgage insurance is not flexible. You don’t get to pick who receives the payout. That’s decided from the start and cannot be changed. Your lender will receive the policy proceeds after your death, even if your family has more critical needs, like paying medical bills.
With mortgage insurance, your monthly premium payments remain the same throughout — but not the death benefit. The payout amount matches your outstanding debt. So as you pay off the mortgage, the death benefit gets reduced.
You essentially pay the same monthly insurance premiums, but for a declining amount of coverage
It covers only one financial need
A Mortgage protection policy serves only one purpose. It ensures your family doesn’t lose the home after your death.
But it won’t take care of their other financial needs, like paying everyday living expenses after you’re no longer there to provide for them. If you want to make sure your family lives comfortably after you’re gone, you may need to buy another life insurance policy.
By contrast, a term life insurance policy can pay off your home loan and cover all other financial needs.
More restrictive age limits
Mortgage insurance usually has more restrictive age limits than term life insurance. For instance, some insurance companies are reluctant to issue a 30-year policy to an applicant aged over 45.
Mortgage protection insurance doesn’t require you to take a medical exam. This may sound great, but this convenience comes at a cost. The insurance premiums for an MPI policy are typically higher than those for a term life insurance policy of the same amount.
Rates are based on preferred health individuals.
Is mortgage protection insurance worth it?
If you don’t want to pass on your mortgage to your family, but you also can’t get affordable term life insurance because of an underlying condition, buying mortgage protection insurance could make sense for you. But if you are in good health, you are likely to get much better value with term life. Also, unlike a mortgage protection policy, it can cover multiple financial needs upon your death.
Mortgage protection insurance pays off your mortgage if you die. Its biggest advantage is that it doesn’t require a medical exam. So if you are in poor health and want to financially protect your home, mortgage protection insurance might be right for you. In all other cases, we recommend going with term life insurance coverage.