Mortgage protection products can provide a safety net for your family in case you're unable to make your mortgage payments due to unforeseen circumstances.
But is it the right choice for you? Here's what you need to know.
Mortgage insurance ensures that your loved ones won't face the burden of mortgage payments if you pass away unexpectedly.
It offers financial security during challenging times, allowing your family to remain in their home without the fear of losing it due to mortgage defaults. The policy's payout matches your insured mortgage balance, and it directly pays off the outstanding mortgage to the lender, providing your family with a mortgage-free home.
However, before deciding on mortgage insurance, consider its aspects carefully. Additionally, take a look at other options like mortgage critical illness insurance coverage, disability insurance, mortgage loan insurance, job loss insurance, Canada employment insurance benefits, and other optional insurance coverage that could provide you benefits.
While it comes with advantages like a simplified application process and no medical exams, it also has limitations.
Continue reading to understand the pros and cons
Then you will be able to make an informed decision that best suits your financial goals and provide the best protection for your family and home.
What is mortgage protection insurance?
Mortgage protection is one of the types of life insurance products 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 insurance plans 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 the monthly premium 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 to pay off the mortgage balance. Your family may have to dip into their savings to pay the monthly payment or risk foreclosure. Either way, the mortgage balance needs to be payed off and 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 mortgage balance to the lender.
Mortgage Insurance can be confusing so it is always best to talk with a professional if you are seriously considering it.
Is mortgage protection insurance the same as mortgage life insurance?
Yes, it is. Mortgage protection insurance is also known as mortgage life insurance.
How much does mortgage life insurance cost?
The cost of a mortgage life insurance policy in Canada can vary significantly based on several individual and policy-specific factors.
One of the primary factors that influence the cost is your age, as older individuals typically pay higher premiums.
Additionally, the death benefit amount you choose also impacts the rates – higher coverage will generally result in higher premiums.
Other factors that may affect your life coverage include your overall health, lifestyle, and any pre-existing medical conditions.
Insurance providers may consider these factors to assess the risk associated with insuring you, and this can affect the final premium amount.
It's crucial to shop around and compare quotes from different life insurance companies with a mortgage broker who will help find the best insurance and the best rate for your specific situation.
|660 Credit Score||700 Credit Score||740 Credit Score|
|Conventional 5% Down||$295||$180||$120|
|Conventional 10% Down||$210||$125||$85|
|Conventional 15% Down||$125||$75||$50|
Prices might differ based on personal debt ratios.
Advantages of mortgage insurance
The policy payout matches your mortgage balance
Mortgage protection products offers several advantages, including a policy payout that directly matches your outstanding balance.
Unlike traditional life insurance, where beneficiaries receive a lump sum that might be challenging to allocate properly, mortgage insurance ensures that the policy proceeds go directly to your mortgage lender, covering the exact outstanding credit balance.
In the event of your death, the policy continues to make monthly payments to the lender until the mortgage loan is fully paid off, providing peace of mind and financial security for your loved ones.
Most life insurance policies require you to complete a medical exam.
If you have a serious illness, you might get turned down. Mortgage critical illness insurance coverage might be an alternative in this case. Since a mortgage life insurance policy doesn’t involve a physical, you can get insurance coverage even with an underlying condition.
Disability coverage protection
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 my monthly mortgage payment 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 or disability insurance premiums may be right for you.
Some mortgage life insurance policies cover payments — for a limited period — if you lose your job or become disabled.
Alternatively, you can consider disability insurance. A disability insurance premium will definitely cover you in case you become disabled. So take a look into disability insurance to see if it the right fit for you.
Disadvantages of mortgage insurance
Mortgage protection, while beneficial, may not always be the most effective method to pay off the outstanding balance in the event of the policyholder's death.
Other potential disadvantages include higher premiums compared to term life insurance, more restrictive age limits, and the inability to select the beneficiary, leaving the payout predetermined to the lender.
To ensure comprehensive coverage and the best financial protection for your loved ones, exploring alternative options like term life insurance with its flexibility and broader coverage may be a more suitable choice.
You can’t select the beneficiary
Mortgage insurance coverage lacks flexibility in selecting the beneficiary.
The policyholder cannot choose who receives the payout, as it is predetermined from the start and cannot be altered.
In the event of the policyholder's death, the lender will receive the policy proceeds, even if the family has more urgent financial needs, such as medical bills or other critical expenses.
This limitation can significantly impact the financial security of the policyholder's loved ones and highlights the importance of considering alternative options like term life insurance, which allows greater control over the beneficiaries and how the funds are used.
With mortgage life insurance, your monthly existing mortgage payment remains 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 premium, but for a declining amount of insurance money 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 mortgage 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 life insurance typically imposes more restrictive age limits compared to term life insurance.
For example, a Canada life assurance company may be hesitant to issue a 30-year policy to an applicant over the age of 45.
This limitation can be a significant consideration for older individuals seeking coverage for a more extended period, making term life insurance a more suitable option for those looking for coverage beyond the age limits set by mortgage life insurance policies.
While a mortgage life insurance policy offers the convenience of not requiring a medical exam, it comes with higher premiums compared to term life insurance for the same coverage amount.
This added cost is due to the simplified underwriting process, making MPI more expensive as it doesn't assess individual health risks as rigorously as term life insurance policies.
It's essential to consider the trade-off between convenience and cost when deciding which mortgage insurance coverage best suits your needs and financial situation.
|$500,000 of mortgage life insurance||$500,000 of term life insurance|
|Male, aged 35||$95/month||$32/month|
|Female, aged 35||$95/month||$24/month|
|Male, aged 45||$260/month||$69/month|
|Female, aged 45||$260/month||$49/month|
|Male, aged 55||$440/month||$204/month|
|Female, aged 55||$440/month||$140/month|
Rates are based on preferred health individuals.
Is mortgage protection worth it?
The decision to get mortgage insurance coverage depends on your specific circumstances.
If you have an underlying condition that makes term life insurance coverage types unaffordable or if you want to ensure your mortgage is covered separately from other financial needs, mortgage insurance could be a suitable option.
However, if you are in good health, term life insurance may offer better value and flexibility, as it can cover multiple financial needs beyond just the mortgage.
Weigh the pros and cons carefully to make an informed choice that aligns with your financial goals and priorities.
Mortgage protection insurance products serve as a crucial safeguard for your finances, offering protection in the event of an unexpected death.
Before making any decisions, take the time to carefully compare rates and plans to ensure you find the best insurance products for your unique circumstances.
By incorporating a mortgage insurance product into your overall life insurance plan, you can provide an invaluable layer of security and peace of mind for yourself and your loved ones.