Mortgages make the dream of home ownership possible. They’re the reason you’re able to buy the home with the large backyard or the one that’s in a neighbourhood with great schools.
But having a mortgage also means that you’re in a long-term relationship with your bank – and not the kind that keeps you warm in bed at night. Instead, if you have a mortgage, you’re in a position where you owe your bank money. And depending on the size of your mortgage, you might spend years or even decades paying it all off. Sigh.
That’s why you might wonder whether you should buy mortgage life insurance. After all, although it’s unlikely that you’ll die before you pay off your mortgage, it’s not impossible. And if you do pass away earlier than expected, you won’t leave this world alone. Your income will go with you.
That means that it won’t be able to pay or contribute to your monthly mortgage payments. And it could end up leaving your family without a home.
Is buying mortgage life insurance the best way to protect your family? Or is there a better way to shield your family from mortgage debt?
Keep reading below to learn about the difference between mortgage life insurance and its best alternative: term life insurance.
What is Mortgage Life Insurance?
Mortgage life insurance is a type of insurance that protects your family against mortgage debt. You buy a policy and pay monthly premiums. And if you die, your insurer pays out a death benefit to your bank to cover the remaining balance of your mortgage.
Mortgage life insurance won’t give you more time with your family or erase the pain of your absence. It’s not a time machine, after all. But it does reduce the financial burden of your death by ensuring that your family won’t have to worry about making mortgage payments.
This is important because now that your income is no longer in the picture, your family might not be able to afford the mortgage payments on top of all of the other expenses that your income is no longer around to cover. And if your family isn’t able to pay the mortgage payments, they’d have to sell the home.
What's the Alternative? Term Life Insurance
Because mortgage life insurance can shield your family from mortgage debt, it may seem like a no-brainer to buy it. But there’s another type of insurance that can give you coverage for your mortgage and benefit your family in a number of other ways too. What are we talking about? Term life insurance.
With term life insurance, you buy a policy for the period of time that you expect to have debt and dependents that need to be protected. For most people, this tends to be 10, 20, or 30 years. Just like with other types of insurance, you pay monthly premiums to be covered. And if you die during the term of your policy, your insurer pays out a death benefit. In this case, though, the death benefit goes to your family, not the bank.
The Benefits of Term Life Insurance Over Mortgage Life Insurance
As you can see, both mortgage life insurance and term life insurance can shield your family from mortgage debt. But for a number of reasons, we usually recommend that Canadians buy term life insurance. Here’s why:
1. Term life insurance covers more than just your mortgage
Mortgage life insurance provides coverage for the entire remaining balance of your mortgage at the time of your death. But it doesn’t protect your family financially in any other way.
In comparison, when you buy term life insurance, you can choose a coverage amount based on all of the debt and expenses you want to protect your family from. Have kids in private school? Does your partner need expensive medical care that isn’t entirely covered by government healthcare plans and health insurance? You can buy a term life insurance policy that covers your mortgage AND these additional expenses.
2. Term life insurance gives you more flexibility with a lump sum payout
If you die while holding a mortgage life insurance policy, your death benefit will cover the remaining balance of your mortgage. And it’ll go straight to your bank.
However, if you instead have a term life insurance policy, your death benefit is paid out to your family in one tax-free lump sum. This allows your family to use the money in any way they’d like. It also gives them the opportunity to pay for expenses that may be different from the ones you thought they would have when you bought your policy.
In other words, term life insurance lets your family use the money to pay for the life they’ll actually have if you die, not the life you had anticipated for them 5, 10, or even 25 years earlier. Useful, right?
3. Term life insurance is (usually) more affordable
When you buy mortgage life insurance, your insurer usually doesn’t do a detailed health assessment. Not having to get poked for a blood sample may sound great. But keep in mind that because your insurer won’t know how risky you are, they’ll assume you’re a high-risk applicant and charge you high premiums for coverage. And that sticker shock might be a whole lot more painful than getting a blood test.
In comparison, if you buy term life insurance, you’ll undergo a detailed health assessment. And your insurer will use the results to determine your premiums. So unless you have an existing medical condition or lifestyle habits that make you high risk, you’ll probably pay lower premiums with term life insurance.
4. Term life insurance stays with you even if you switch mortgage providers
Need to switch your mortgage provider? You won’t be able to take your mortgage life insurance with you. Instead, you’ll have to go through the headache of applying again. And you’ll probably have to pay higher premiums for your new policy.
Term life insurance isn’t tied to your mortgage. So even if you switch mortgage providers, your insurance policy will stay the same.
5. Term life insurance coverage can extend past your mortgage term
Because mortgage life insurance covers just your mortgage, your coverage ends once you pay off your mortgage. This is different from term life insurance coverage, which lasts for the time period you selected when you bought the policy.
So even if you plan to pay off your mortgage within a decade, you can buy coverage for 20 or even 30 years if you expect to have dependents or other debts beyond those first 10 years. Kids, pets, and even spouses sure can be expensive, so having that option never hurts!
When Mortgage Life Insurance Might Make Sense
As you can see, term life insurance can give you broader coverage that’s more flexible and usually more affordable. For these reasons, we typically recommend buying term life insurance and steering clear of mortgage life insurance.
That said, there are some cases when it may make sense to buy mortgage life insurance.
One of these cases is if you have an existing medical condition that may make it difficult to get term life insurance. Because insurers usually don’t perform detailed health assessments for mortgage life insurance, you’re more likely to get approved. So if your health history is holding you back from protecting your family with term life insurance, mortgage life insurance can be a good alternative.
The other case is if you want to make sure that there’s dedicated money set aside to pay off your mortgage. This may be important if you think your family may have trouble managing a lump-sum payment and prioritizing monthly mortgage payments.
If either of these cases applies to you, buying mortgage life insurance may make sense. But if you can get approved for term life insurance and want broader or more flexible coverage, term life insurance is your best bet.