Buying a property can be a time-consuming experience, especially for first-time homebuyers. There is a mountain of paperwork to review and sign and finances to get in order, which involves serious planning.
No matter how prepared you think you are, there will be something (hopefully small) that is bound to throw you off guard — like the mortgage life insurance form that typically accompanies your documents when you get a mortgage in Canada. It certainly looks important, but do you need it?
Mortgage life insurance, also known as mortgage protection insurance, is an optional coverage that you can purchase from your lender. Not to be confused with mortgage loan insurance, which is mandatory for Canadian homebuyers with down payments of less than 20% and protects the lender from default, mortgage life insurance promises to pay all or part of your remaining mortgage balance upon your death.
The coverage lasts the length of your mortgage term, which for many is typically five years, in exchange for a monthly or annual premium. You can renew your coverage when you renegotiate your interest rate with the lender.
Mortgage life insurance may sound like the perfect safeguard for your biggest investment — your home. However, it’s not quite that simple.
While this type of policy can ensure your loved ones aren’t left with mortgage payments they can no longer afford without your income, it does little else. Unlike a term life insurance policy, for instance, which pays a tax-free lump sum payment to your beneficiaries, the money from a mortgage life insurance policy will go directly to the lender to cover the outstanding loan balance.
Therefore, your family won’t get additional funds to cover debts, funeral expenses, lost income, or anything else they may need, like education or daycare services after you’re gone. Not only that, but your coverage also decreases over time. As you make mortgage payments, a portion goes toward the principal and another part toward the interest — reducing your mortgage balance and, in turn, the death benefit from your mortgage life insurance policy. Although the premium you pay typically stays the same.
Additionally, you will need to reapply for mortgage life insurance if you switch lenders since the coverage is an add-on from the bank or financial institution you initially signed your mortgage with. If you plan to renew or renegotiate your mortgage, you will have to do the same for your mortgage life insurance, too. You could wind up paying a higher premium since you’ll be older.
It’s easy to sign up for mortgage life insurance. The application process is usually no more than a page long, and there isn’t a medical questionnaire. However, you won’t know if you qualify until you make a claim.
As surprising as that sounds, mortgage life insurance is post-underwritten, which means the underwriting of the policy happens after death occurs. This is contrary to almost all other insurance forms, which undergo a pre-underwriting process before any coverage is required.
The issue with a post-underwriting method is that the insurance provider can reject the policy, and they reserve the right to do so.
In short, nearly everyone can sign up for mortgage life insurance, but there is no way to forecast if you are eligible before you need it.
Fortunately, there are more definitive and flexible options available. A term life insurance policy is an excellent choice for not just first-time homebuyers but expecting parents, newlyweds, and renters alike.
Some of the benefits of a term life insurance policy include:
While this type of coverage may require health tests or a questionnaire, underwriting happens when the policy is issued. So, your family won’t get any unwelcome surprises during a difficult time.
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