Mortgage life insurance may not be the best way to protect your loved ones - it actually may cost you more in the long run.
In this article, we'll break down exactly what mortgage life insurance is and why term life insurance coverage is probably enough to protect you and your loved ones.
What is Mortgage Life Insurance?
When you start talking to mortgage lenders while looking for a house, mortgage life insurance may be a product that ends up being offered. Between the mortgage itself, home insurance, down payments, or title insurance (just to name a few fees!), it can get lost in the craziness of such a big purchase.
Mortgage life insurance (also known as creditor's insurance or mortgage protection insurance) is a form of insurance that is designed specifically to protect your ability to repay your mortgage on your home.
Just like the structure of your life insurance, you would pay a monthly premium to a mortgage life insurance provider so that if something were to happen to you, your mortgage can still be paid off in full and your family won't be burdened with it. The death benefit from your mortgage life insurance will go directly to paying off the bank or mortgage lender, whichever you were paying off your mortgage to.
The premiums for your mortgage life insurance do not include your monthly payments towards your mortgage - mortgage payments and mortgage life insurance premiums are two completely separate monthly budget items. As the balance of your remaining mortgage goes down, the monthly fees you pay for your mortgage life insurance stay the same. You are paying your monthly fees based on the original value of your mortgage - not what it is valued at after each monthly payment.
To put it simply, you're paying the same monthly premium for a decreasing coverage amount, meaning that your mortgage insurance essentially gets more expensive over time.
So, Why Don't You Need Mortgage Life Insurance?
For many, mortgage life insurance and term life insurance seem like two very similar products - they both come into play when you pass away, both pay out a "death benefit" in a lump sum, and both can be used towards paying off a mortgage.
The death benefit from mortgage life insurance goes directly to your mortgage lender. It can only cover the balance remaining on your home, and your family doesn't actually seethis money at all.
Also, mortgage life insurance is tied to your home, which may change. Your mortgage insurance coverage matches the value of the home and the length of your mortgage. This means if you move, you'll have to start your mortgage application all over again. And at a higher age, you'll be paying a higher rate. It makes sense to lock in a term life insurance policy so your rates stay the same, whether you stay in one home or move five times.
Still not convinced? Here are some of the reasons why you won't want mortgage life insurance.
Mortgage Life Insurance is More Expensive
Question: When would you want to pay more than you have to for something?
Answer: Almost never.
Simply put, you're going to pay more for mortgage life insurance than you're going to for a term life insurance plan when you don't actually need it. This is because mortgage life insurance is not fully underwritten. To qualify, you answer a few simple questions upfront.
And having no medical is costly. Here's a price comparison of term life insurance versus mortgage life insurance for a healthy 35-year-old male getting $500,000 in coverage.
|Insurance Provider||Type of Insurance||Monthly Cost|
|PolicyMe||Term Life Insurance||$31.29|
|RBC||Mortgage Life Insurance||$65.00|
|BMO||Mortgage Life Insurance||$65.00|
|TD Canada Trust||Mortgage Life Insurance||$85.00|
|CIBC||Mortgage Life Insurance||$90.00|
|Scotiabank||Mortgage Life Insurance||$90.00|
This is the case with any no medical insurance product, including term life insurance. Term life insurance is fully underwritten, meaning you're going to have a significantly cheaper monthly cost.
You can see how major these savings are above - why pay so much more when you don't have to? You can pay less and still have your mortgage covered.
Your Payments Don't Decrease, But Your Mortgage Does
Imagine paying the same price for something that is worth less and less as time goes on. It would be pretty frustrating, right?
That's kind of what you're doing with mortgage life insurance. How? Let's break it down.
Let's say you have a $500,000 mortgage. Every month, you pay off a set amount of this mortgage. Let's say you're paying $1,000 a month. That means you're paying off $12,000 a year of the outstanding balance on your mortgage - great!
After 20 years, you've paid off $240,000. You're halfway there - there's only $260,000 left - when something happens to you and you pass away, essentially leaving that half of your mortgage behind for your loved ones.
Now at this point, you'd already paid off half of the mortgage. But even as the balance on your mortgage decreases, your monthly payments towards your mortgage life insurance have stayed the same, despite the fact that the value of your plan is actually decreasing. If you passed away at the beginning of your mortgage, they would have to pay a whole lot more than 20 years down the road.
Why should you pay the same price for coverage on something that technically loses value for every payment you make towards it?
Term Life Insurance is a More Flexible Product
With mortgage life insurance, you're only covering one financial area of everyday life for your loved ones. Term life insurance gives them the flexibility to put that money exactly where they need it.
If something were to happen to you, your term life insurance plan is in place. Your loved ones receive the death benefit in a single payout (the value of this payout depends on the value of your plan you decided on when you signed for it). While receiving a death benefit doesn't ease the pain of losing a loved one, it does give your family the financial flexibility to put the money where they actually need it. This can still include a mortgage, but it doesn't mean that's the only place they have to put the money.
On the other hand, your mortgage life insurance death benefits will only be able to go towards completely paying off your mortgage. The money cannot be put towards any other expenses that your family may struggle with in the event you pass away.
While it obviously is important to be able to continue monthly mortgage payments, it may be a little more important to give your family the flexibility to put that money exactly where they need it most.
There's a Lack of Transparency and Understanding
Breaking down mortgage life insurance quotes can be frustrating. It's hard to find quotes online, meaning it's difficult to compare between brokers and providers. With the lack of ability to find these numbers online, the prices can vary hugely - and you would be none the wiser!
Doesn't seem like a great deal, getting a potential bad price for the coverage you could get from a transparent term life insurance rate.
Mortgage life insurance is also a harder-to-understand product. The different forms of mortgage insurance, the unclear questions, and the speed of the process can make it hard to understand. People may not look into it more once they're already approved.
You should get to enjoy this amazing new purchase you just made - signing for your new home is huge! You shouldn't be trying to sort through monthly bills packed with fees that aren't actually doing anything for you.
Take the money you would have been putting towards that monthly mortgage life insurance premium and treat yourself. Rest easy knowing that your term life insurance plan has you and your loved ones covered for a fair price.