The average loan amount for new mortgages in Canada in mid-2022 was a whopping $367,500, according to Equifax.
Plus, high interest rates and rising inflation are making it tougher than ever for Canadians to make their monthly mortgage payments.
That’s why it’s essential to get a term life insurance policy to make sure your mortgage can be paid off if you pass away prematurely, especially if you have dependents such as a spouse, elderly parents or minor children.
Yes. Term life insurance can be used to pay off your mortgage.
No one should have to deal with the stress of mortgage payments while grieving the loss of a loved one.
And term life insurance is better equipped to help with this than mortgage insurance, which we’ll get into below.
It’s important not to confuse term life insurance with mortgage default insurance, which protects the lender in the event that the mortgage holder is unable to make payments on their mortgage.
Term life insurance is also different than mortgage life insurance. Typically, when you get a mortgage, lenders will offer you mortgage life insurance.
So how does mortgage life insurance work? If the mortgage holder passes away, mortgage life insurance is supposed to pay off the remaining mortgage balance and ensure that dependents can continue to live in the house without having to worry about future mortgage payments.
However, mortgage life insurance quotes have garnered a lot of criticism, namely because it offers limited flexibility (i.e., you can only use it to pay off the mortgage), and you continue to pay the same premium even as your mortgage balance decreases over time.
Alternatively, term life insurance offers the same benefit: the beneficiary can use the payout to pay off the mortgage in the event the policyholder passes away.
But they can also use the funds to cover many other expenses, since coverage can span from below $100,000 to over $5 million.
Term life insurance covers the policyholder for a specified period of time, usually ranging from 10 to 30 years, which works well to cover the period when you still owe money on your mortgage.
You can get a shorter coverage period if you expect to pay down your mortgage faster, which is also more affordable, though the price also depends on other factors, such as the coverage amount, your age, and your sex. Use an online term life insurance calculator to figure out exactly how much life insurance you need.
Term life insurance generates a tax-free death benefit if the insured person passes away during their coverage period. This helps the beneficiaries (the person listed in the policy who will receive the payout) deal with the financial impact of the policyholder’s death.
The death benefit payout can be used to pay off mortgage debt and for whatever else the beneficiary wants.
If you’re considering getting a term life insurance policy, make sure you talk to your beneficiaries about how to claim the death benefit payout just in case.
Here’s how beneficiaries can claim the death benefit:
While you can put the entire death benefit payout toward the mortgage loan, you’ll want to first make sure the mortgage lender doesn’t charge you a prepayment penalty.
A prepayment penalty is a fee that you may be charged when you pay more than the amount allowed or pay back your entire mortgage before the end of your term.
Lenders make money by charging interest on your mortgage, and the longer you take to pay back the principle, the more interest they can collect.
If you pay back your entire mortgage before your term is up, lenders lose interest and as a result, charge a prepayment penalty to recoup that loss.
Prepayment penalties can cost thousands of dollars, so it’s important to understand the type of mortgage you have and whether a prepayment penalty would apply.
In either case, it is worthwhile to have a conversation with your loved ones about the financial health of your family and how to prepare for the unthinkable.