Even if you have a good job and a decent balance in your savings account, home ownership is expensive. That’s why you’ll probably take out a mortgage the next time you buy a home.
But in many cases, your mortgage broker won’t just try to sell you a mortgage. They’ll also pitch their mortgage life insurance — insurance that’ll cover your remaining mortgage payments if you die and your income disappears.
Buying mortgage life insurance may seem like a really good idea. After all, according to LIMRA, 75% of Canadians say they would struggle to pay daily expenses, such as a mortgage, if their family’s primary breadwinner passed away. And you certainly don’t want your family to be short on money or have to move out of your home if you passed away before your mortgage was paid off.
But just like you wonder whether you really need to buy that protective spray for the shoes you’re about to purchase, you might wonder whether you need mortgage life insurance to go with that mortgage.
Here’s what you need to know about mortgage life insurance and whether it’s a smart purchase.
If you were to die, your family would have to find a way to cover all of the expenses that your income is currently paying for. So if your income is covering even a portion of your home’s mortgage payments, your family would have to find another source of funds to make the payments.
Mortgage life insurance ensures that your family doesn’t end up in this situation. If you purchase a mortgage life insurance policy, pay the monthly premiums, and die while holding the policy, the insurer will cover the cost of your remaining mortgage balance.
This way, your family won’t have to sacrifice their lifestyle or sell the home to stay afloat financially.
There are some situations where buying mortgage life insurance may make sense:
First, when you apply for mortgage life insurance, your insurer won’t assess your health in the same kind of detail that they would if you were applying for standard life insurance. Yes, this means that your insurer will charge you sky-high premiums to compensate. But if you have a medical condition that would make it difficult to get standard life insurance, mortgage life insurance is a good alternative.
Second, the death benefit for mortgage life insurance can be used only to pay off your mortgage. So if you think your family might have trouble prioritizing expenses to pay off with a standard life insurance payout, buying mortgage life insurance may make sense. With mortgage life insurance, you can guarantee that there will be money set aside to pay the rest of the mortgage.
Although mortgage life insurance may have advantages in some cases, it also has a number of cons. And it’s important to be aware of them.
The main drawback of mortgage life insurance is that the scope of its coverage is pretty darn narrow. After all, as we said above, your death benefit can be used only to pay off your mortgage. It doesn’t matter if your family already has another source of money to cover your monthly mortgage payments and wants to use the money to pay for other expenses instead. Mortgage life insurance protects your family only against mortgage debt.
In addition to this drawback, mortgage life insurance also has several other limitations:
As you can see, mortgage life insurance can be pricey without giving your family the flexible coverage it really needs. So is there another option out there that gives you better bang for your buck?
There sure is. And it’s called term life insurance.
With term life insurance, you buy a policy, you pay monthly premiums, and a death benefit gets paid out if you die while holding the policy. So far, this sounds a lot like mortgage life insurance. But here’s how a standard term life insurance policy is different:
When you have term life insurance, your death benefit is paid out to a beneficiary of your choice as one tax-free lump sum. So if your beneficiary is your family, they can use the money in any way they like. They can use it to cover your mortgage payments, or they can choose to spend it on other expenses.
Another defining feature of term life insurance is that you choose your coverage amount and the number of years you want your policy to last for.
People typically choose terms of 10, 20, or 30 years because after that point, they’ve probably paid off their mortgage and are less likely to have dependents. As a result, with term life insurance, you can buy coverage for your mortgage and any other expenses you want to shield your family from. And you pay for coverage (aka those money-draining monthly premiums) only during the years that you actually need coverage for.
Believe it or not, though, that’s not even the end of the benefits. Term life insurance also has several other advantages:
At first, buying dedicated coverage for one of your biggest purchases (and biggest sources of debt), seems like a smart idea.
But the reality is that unless you know for sure that you’ll only ever need coverage for your mortgage, term life insurance is the better option. It can give you more protection and more flexibility down the road for what’s usually a lower monthly price.
And you know what that means — more money left over in your bank account to spend on tropical vacations, hockey tickets, and other expenses that are WAY more fun than life insurance.