Mortgage Life Insurance Explained

With the housing market being in overheated condition nowadays, Canadians are buying homes more than ever. National home sales are consistently beating the prior record and of course, in times like this, everyone talks about housing bubbles, crashes, and so forth. But fortunately, this is not the topic of our discussion.

With all the difficulties you must go through to be able to get your dream home, from multiple offer nightmare to mortgage negotiations, it is no wonder home quickly turns in your most loved asset; you have literally put your blood and tear into it. Therefore, you will do everything to protect it and keep it for your family. How do you protect your home against unexpected life and financial incidents?

When you buy a home, your lender usually tries to sell you mortgage life insurance. They usually just add a few additional pages to the mortgage offer that they send you for review. The insurance is meant to cover the remaining mortgage payments in case you lose your income or die. This way, the lender protects their interests, and your family is assured that the house is paid off.

Buying a home is expensive, and if the main breadwinner cannot contribute towards its repayments, most families struggle to hold onto it. However, is buying mortgage life insurance the smart thing to do?

Mortgage life insurance explained

Like many other Canadians, the household income (your spouse and yourself) is the main source that pays the mortgage; this is the biggest expense in each family comprising almost 30% of the income and maybe more for some other families.

If the income is lost or reduced, it is very simple for you to realize that it will be difficult to make up for the payments depending on how much of the income is lost. The premiums you pay toward a mortgage life insurance are meant to protect your family.

Depending on the clauses of your mortgage insurance, you may use the policy if your income is reduced due to disability or critical illness, which the insurer will pay out if your situation matches their required definition. Almost all mortgage insurance has coverage for death and the insurer pays the death benefit to the lender (bank, mortgage company, and so forth) and releases your family from the mortgage commitment.

Pros of mortgage life insurance

There are two pros to buying mortgage life insurance:

• Your health is not assessed by the insurer like it is when you apply for normal life insurance. Unfortunately, this means your premiums will be much higher to compensate for the risk they are taking. This is a good way to ensure you have coverage for your mortgage repayments if a health condition makes it difficult for you to get term life insurance.
• Your family can only use the death benefit to pay off the mortgage of your home. If you find you cannot prioritize life insurance right now, then a mortgage life insurance guarantees that your mortgage will be paid off if something happens to you.

Cons of mortgage life insurance

The two advantages of mortgage life insurance are outweighed by its disadvantages:

• The scope of the coverage only allows the death benefit to pay off your outstanding mortgage.
• Unfortunately, even if your family can meet the mortgage payments, they cannot use that money for anything else.
• You cannot choose a beneficiary. It must be your lender.
• It can be quite expensive.
• If you switch banks, the policy cannot be transferred.
• The death benefit declines as your mortgage decreases.
• Your coverage ends the moment you owe no more money to your lender for your mortgage.

Are there alternatives to mortgage life insurance?

Because mortgage life insurance is expensive and offers no flexibility, we always recommend you look into other alternatives unless your specific situation prevents you (for example health issues). Our most recommended alternative to mortgage insurance is term life insurance which gives you coverage for your chosen amount over the whole term of your policy. This may sound very much like mortgage life insurance, but it does differ in the following ways:

• With a term life insurance policy, you get to choose the beneficiary of your choice.
• Your beneficiary gets a tax-free lump sum on your death.
• The money can be used to cover the mortgage payments, but it can also be used to cover other necessary expenses.
• You get to choose the amount of coverage that will meet your family’s needs over the years of the term you have chosen.
• You can choose how many years you need the coverage for (10, 20, or 30 years).
• You only pay premiums over the years of your chosen coverage.
• Term life insurance is far more affordable.
• You keep your coverage throughout your policy, even if you switch your mortgage to another bank.
• Your death benefit does not decrease but stays the same throughout the policy’s term.
• Your policy term is not dependent on your mortgage term.

Which is the smartest choice: Mortgage or term life insurance?

For most people in Canada, their home is their biggest purchase and forms a major part of their retirement plans. However, it is also their biggest debt.

Without a doubt, if your income plays a major role in the repayment of this debt, you need to ensure that you have coverage for it if something were to happen to you.

However, mortgage life insurance is only necessary if the only coverage you need is for your mortgage, and your family will have a secure source of income from elsewhere. Otherwise, a term life insurance policy offers them more flexibility and protection for its whole term, ensuring your family can pay off the mortgage, complete their education, etc.

Term life insurance is less expensive, so your lower monthly premiums will mean that you can save the extra cash for other important moments in your life.