When shopping for a mortgage, you might have been told about mortgage life insurance. Chances are, you were left unclear about whether you actually need mortgage life insurance or whether there are other options.
As a mortgage holder, you’ve joined the 63% of Canadian families that own their home, with all the joys and responsibilities that come with it. Including making sure your loved ones don’t need to worry about paying off your mortgage balance if something were to happen to you.
In this post, we’ll cover the pitfalls of mortgage life insurance and why term life insurance can offer the same protection with more benefit to you.
Mortgage life insurance is a popular type of life insurance offered through your bank or mortgage broker. In fact, 25% of Canadian parents with kids under 18 have mortgage life insurance.
With mortgage life insurance, you pay a premium based on your age and the amount of your mortgage, which is then added to your mortgage payment.
In the event that you pass away, whatever amount remains on your mortgage will be paid off and your family will own your home outright with no further mortgage balance to pay.
There are several types of insurance related to a mortgage and it’s important to understand the differences.
Mortgage protection, also called mortgage life insurance, is a type of policy usually offered through the mortgage lender that will pay off the balance of your mortgage if you pass away.
Mortgage default insurance, which you may have heard referred to as CMHC insurance, is mandatory if the down payment on your property is less than 20 percent. It’s designed to protect the lender in case you’re unable to make your mortgage payments.
Home insurance or homeowners’ insurance is there to cover you if your home is damaged, for example in a fire or due to vandalism. Your mortgage company will require you to have home insurance before lending you the money for your mortgage.
As parents, we’re all about easy solutions. And adding mortgage life insurance premiums to your regular mortgage payments probably seems like an easy way to protect your family.
The problem is, mortgage life insurance is expensive because it’s not underwritten, and the premiums remain the same throughout the life of your mortgage. In the meantime, the amount of your mortgage is getting smaller, and so the benefit that will be paid out if you pass away becomes less and less.
That said, mortgage life insurance is easy to qualify for, making it the right choice for some families. We’ll dive into who it’s right for below.
For most Canadian families, term life insurance is the best way to get the mortgage protection you need. That said, there are instances where mortgage life insurance makes sense.
Here’s how you can start thinking about what product can provide you with the most value.
If your goal is to have your mortgage paid off if you were to pass away, both mortgage insurance and term life insurance can give you that protection.
With mortgage insurance, the premiums are tied to your current mortgage amount. They will remain the same until the mortgage is paid off, even as the outstanding principal on your mortgage decreases.
The benefit paid out is equal to the amount left on your mortgage and will be paid to the lender if you pass away, not your partner and/or kids.
With term life insurance, you have more control and flexibility. You can choose the benefit amount as well as the term.
For example, you could set a term of 30 years, equal to your mortgage amortization period, or you could set a 10-year term and re-evaluate your needs at that time. At that point, the amount remaining on your mortgage might be lower, but you may have more dependents and want to take that into account when choosing your coverage.
The cost of mortgage life insurance is tied to your current age and the amount of your mortgage.
Your premium stays the same throughout the life of your mortgage even though the amount that will get paid out decreases.
It also goes up significantly with age, so if you renew your mortgage with a new lender down the road and require a new policy, the premiums will likely be higher.
This table helps you understand the difference in cost between mortgage life insurance and term life insurance.
As a parent juggling financial responsibilities, you want to know you’re getting the best coverage for the most affordable price. That's why at PolicyMe, we’ve streamlined the traditional insurance process by removing unnecessary steps and costs. Meaning: your policy is the same quality, just at a lower rate than other policies in Canada.
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Mom of Poppy and blogger Lauren Sheriff got sucked into a confusing mortgage life insurance policy when she got her mortgage.
But as she writes on her blog, Basic Babe, she wasn’t happy with the process and didn’t really know what she was covered for. That’s why she cancelled her insurance in favour of PolicyMe’s term life insurance offering.
Dad of Everly, Adam Wylde, got serious about life insurance coverage after his daughter was born.
He had group insurance through work and mortgage life insurance that would protect the bank, but neither of them was really enough to offer his family the protection it needed if something were to happen to him.
When he found out about PolicyMe, he realized he could get flexible coverage for his family that would take care of all their needs.
If you’ve decided you want insurance coverage for your mortgage, but don’t want mortgage life insurance, term life insurance is a great option. That’s because with term life insurance, you choose your total insurance coverage amount.
You also choose the term length of your insurance policy, whether that’s 10 years, 20 years, or 30 years.
For example, you could choose a 20- or 30-year term, depending on the length of your mortgage and know you’re covered for the entire period.
Alternatively, if you want lower monthly payments, you could get a 10-year policy that covers half or three-quarters of your mortgage. As your mortgage gets paid off it becomes less of a liability for your family, at which time you can get a new policy for a lower insurance coverage amount.
If you pass away during the term of your policy, the amount of your benefit is paid to your family in a tax-free lump sum that they can use in whatever way makes the most sense at the time. If your mortgage is mostly paid off, for example, that money can be put towards education or other expenses to reduce financial hardship.
If you have a mortgage and a family, you should have some type of protection in case something were to happen to you. But despite the strong sales pitch for mortgage life insurance, it’s probably not the best option.
With term life insurance, you can get similar protection with more flexibility and lower premiums.
PolicyMe makes it easy to get term life insurance. Just apply online and find out if you’re approved in 20 minutes or less.
The cost of a mortgage insurance policy is based on a formula that takes into account your age and the principal amount of your mortgage.
How long you need coverage for your mortgage depends on many factors, including the amortization period of your mortgage and the principal that’s left on it.
Mortgage life insurance covers you until your mortgage is paid off. Term life insurance, on the other hand, is set for a certain number of years and can be re-evaluated when the term is up.
Your mortgage is one of your major expenses and plays a big role in your need for life insurance. But even if it’s paid off, you might have other expenses, like education costs for your kids or a retirement fund for your partner.
So while it’s possible you can cancel your life insurance once your mortgage is paid off, you need to make sure you’re taking the whole financial picture into account.
Your mortgage is attached to your home, so when you pass away, the outstanding mortgage balance will go wherever your house goes. This means if your house transfers to your spouse, the responsibility for monthly mortgage payments goes to them as well.
Otherwise, your estate will have to pay back the mortgage debt before any assets will be inherited by either selling the home or using life insurance proceeds.