Do You Need Insurance With A Mortgage?

Your first home! As the exclamation mark notes, that’s exciting. But it’s also your first mortgage, so those feelings of uncertainty and vulnerability … yep, that comes with the excitement. To help calm your anxiety you may want to consider getting an insurance policy for your mortgage – a hedge, so to speak, to protect your biggest investment from any unexpected surprises in your life and to your income.

To help you with your decision let’s start with the following questions.

Can you get a mortgage without life insurance?

Definitely. A life insurance policy is not necessary in order to get approved for a mortgage in Canada. But if you already have a life insurance policy or are thinking about getting one, that may influence your decision about getting a policy for your mortgage. We’ll explain below.

What kinds of mortgage insurance are available?

There are two distinct types of mortgage insurance here in Canada: One is optional, the other, in certain cases, is not.

Mortgage life insurance or mortgage protection is an optional product typically sold by banks or your mortgage lender. The policy works like this: if you should die, your insurer guarantees that the remainder of your mortgage will be paid off so that your family and/or dependents can stay in the home. Mortgage life insurance can be purchased from your mortgage lender or through another financial institution or insurance company.

But before buying mortgage life insurance check if you already have insurance coverage, either through your employer or from another policy.

It’s possible your insurance policy would provide enough funding to help your beneficiaries – family and/or dependents – cover your home’s mortgage payments in case of your death or can no longer work due to illness, an accident or a disability.

Mortgage loan insurance is mandatory if you put less than 20% down on your home. It’s offered through the Canada Mortgage and Housing Corporation (CMHC), and it protects your lender NOT your family or dependents. It ensures that your mortgage lender won’t lose all their money if you stop making payments on the loan for whatever reason. Hey, lenders need protection too! To obtain mortgage loan insurance, lenders pay the premium set by the CMHC. Typically, your lender will pass the cost of the premium on to you.

The premium for a mortgage loan insurance policy is based on the loan-to-value ratio: mortgage loan amount divided by the purchase price. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.

Is mortgage life insurance worth it?

Generally, yes – but we do have caveats. First, let’s look at the benefits.

The benefits of mortgage life insurance

Think about it: What happens if you were to die unexpectedly? Your family could end up dealing with the financial responsibility of paying the mortgage payments alone. Mortgage life insurance ensures the mortgage is covered, relieving your family or dependents from the financial burden of covering the original mortgage payments. Also, for some policies, you don’t have to die to take advantage of its coverage. As well, most mortgage life insurance policies offer coverage if you become disabled or are unable to work.

The downsides to mortgage life insurance

But as noted above, there are a number of significant drawbacks to mortgage life insurance.

  • First, your bank is the beneficiary, not your family. So although the policy protects your family from mortgage debt, they won’t see any of the money when your disability or death benefit is paid out. It all goes directly to your lender.
  • The money can only be used to paying off your mortgage. Your family or dependents wouldn’t be able to use the money cover other important things like school tuition or daily living expenses.
  • For some policies, the payout amount decreases in value as you pay off your mortgage. That’s because mortgage life insurance premiums are a fixed rate, but the payout is generally fixed to your mortgage principle. That means the value of the policy decreases as you’re paying off your mortgage.
  • Another significant downside is it tends to be more expensive than standard life insurance. That’s because mortgage life insurance is a simplified issue life insurance – you don’t have to undergo a medical exam and the underwriting process is less precise. But to make up for this, the lender will charge you higher premiums than what you’d pay for a standard life insurance policy.
  • You won’t be allowed to transfer your policy if you switch banks. Instead, you’ll have to re-apply and that may mean paying a higher premium for a new policy.

The alternative to mortgage life insurance: term life insurance.

Because mortgage life insurance comes with a number of restrictions and significant costs, many, including us, recommend term life insurance. In many ways, term life insurance acts in the same way as a life insurance policy. if you should die or can no longer work, your insurer guarantees that your total coverage amount (this is the amount specified in the policy contract) will be paid to your family in one tax-free lump sum.

Our advice: Go with term life insurance

For the reasons noted above, term life insurance is the better alternative.

Keep in mind, there is a health assessment in order to be approved for a term life insurance policy. If it turns out you don’t qualify for term life insurance, then mortgage life insurance should be your considered option.