Imagine this scenario: You’re a new homebuyer in the final stages of closing a mortgage. Suddenly, the lender rep asks if you want to take out a life insurance policy for your mortgage.
It feels like a high-pressure sell.
The rep promises you’ll sleep easy with this protection, knowing that your family won’t be left with a mortgage should you die or fall ill.
But it'll add tens to hundreds of dollars to your mortgage payment.
Do you take it?
What Is Credit Life Insurance (CLI)?
First, some basics about credit life, also commonly known as Credit Insurance, Credit Protection Insurance, Creditor’s Insurance and a host of other brand names like Manulife’s “Mortgage Protection Plan.”
And just so we're clear, “credit life insurance” is very different from "default insurance," which is generally required by law when you purchase a home with less than 20% down.
Basically, CLI is optional insurance you can add to your mortgage that would pay off your remaining balance in the event of death, severe illness, disability or job loss. It can also be purchased for Home Equity Lines of Credit (HELOCs), lines of credit and credit cards.
In all cases, the insurance pays off the credit-holder’s outstanding balance in the above-mentioned scenarios, depending on what you sign up for.
The question for most homebuyers is whether it’s worth the added monthly cost.
The answer depends on how much you value peace of mind and what alternatives you have. For a minority of homeowners, CLI costs less and/or protects you more than insurance they could get elsewhere. Many others will save more by shopping an insurance comparison website or calling an insurance agent.
Let’s take a closer look at some of CLI's strengths and weaknesses.
What Are the Pros?
First of all, satisfaction is reportedly high (87 percent) among Canadians who purchased CLI for their mortgage or HELOC.
That’s according to a poll commissioned by the Canadian Association of Financial Institutions in Insurance (CAFII). That survey found another 80 percent reported satisfaction with their claims experience, and 94 percent for those who had their claims paid. (Albeit, some may be skeptical to put a ton of weight in that poll given it’s commissioned by an industry group.)
David Moorcroft, a media spokesperson for CAFII, points out some of the other benefits of CLI:
- It’s easy to obtain: Generally speaking, it can be approved on the spot with your lender. Roughly 84 percent of applicants are approved upon completion of a short-form application, according to Avalon Actuarial. “Credit Protection Insurance for mortgages and loans is convenient, price-competitive and easy to obtain,” Moorcroft noted. “For example, most applicants for this type of coverage are insured immediately without the need for additional health questions or medical tests.” It’s a convenient option for the two-thirds of households that don’t have a life insurance agent or broker. However, there is a downside to this, as you’ll see in the “Cons” section.
- It’s usually better than nothing: A study by the Life Insurance Market Research Association (LIMRA) found life insurance ownership in Canada is at a 30-year low. The same study found one-third of Canadians would have trouble meeting their everyday living expenses in the event of a wage-stop for the primary wage earner. Pollara research reinforces this, finding that 71 percent of those surveyed believed their families would have trouble coping if an unexpected life occurrence affected their finances. The need for life insurance is highest among households with little budgetary flexibility and/or fewer assets to fall back on.
- It’s sometimes less expensive: Moorcroft’s data suggests CLI is less expensive than 10-year term life insurance for 94 percent of customer profiles, and less expensive for 20-year term life for more than half of customer profiles (55 percent). We cannot confirm or refute that but it does convey more of an edge to CLI than we've heard in the past. He adds that CLI is particularly competitive for:
- Smokers: If you smoke, the CLI lender’s group life premium might be lower than you can find with a standalone life insurer for a similar amount of coverage.
- Disability: Credit protection disability insurance is often less expensive than individual disability insurance.
- Critical illness: CLI critical illness insurance is usually less expensive than individual critical illness insurance. However, its total coverage is often not as broad as individual coverage.
- Interesting fact: The three illnesses commonly covered by Creditor Critical Illness Insurance products are cancer, heart attack and stroke. According to the Munich Re Individual Life Insurance Survey based on individual policy claims in Canada, until the end of 2009, cancer, heart attack and stroke are the most common types of illnesses for which benefits are paid for Individual Critical Illness policies. These three illnesses account for 86 percent of paid claims.
- Job loss: Credit Protection Insurance also offers job loss insurance in some cases, which is difficult to find as an individual insurance coverage.
What are the Cons?
A common criticism of CLI is that, while it’s easier to obtain than term life insurance, it’s also more expensive. Here’s one anecdotal example:
A 35-year-old male with a $500,000 mortgage might be looking at a creditor life premium of around $65 a month, according to this BMO insurance calculator.
A 25-year life insurance policy, on the other hand, runs closer to $45 a month—a nearly 30 percent savings.
IMPORTANT NOTE: Premiums vary widely based on age, health, etc. These numbers are just examples and not applicable to your specific case. To find out what a term life insurance policy would cost for you, visit a licensed agent or Kanetix.ca to obtain your own personal quote.
“Over 25 years, that amounts to more than $5,000,” writes insurance industry blogger Brian So. “Plus, the [term life insurance] premium is guaranteed for 25 years and the death benefit never decreases.”
Not to mention, CLI expires once the mortgage is paid off (people pay off their mortgage in roughly 20 years on average). By contrast, regular life insurance is good for its entire specified term.
Another key difference is that proceeds from CLI go directly to your lender, whereas life insurance provides a cash payment to the beneficiaries you choose.
“This means you have no choice on what to do with the proceeds from the death benefit. It will always be used to pay off the mortgage,” So notes. “You don’t have the flexibility of using the death benefit for other purposes like investing and paying final expenses.” In fact, if a spouse dies and leaves the family financially strapped, paying off the mortgage won’t allow for easy payment of other monthly obligations.
He lists more key drawbacks of CLI as well:
- The coverage amount is only as much as the mortgage, which decreases over time.
- Your application might be completed by a lender representative, not a licensed insurance agent who understands all the risks (always, as for a licensed insurance agent to help you fill out the application, especially if you have any health questions whatsoever).
- Lender CLI policies aren’t portable. If you switch lenders at renewal time, your mortgage coverage ends and you’ll have to re-apply with the new lender (at potentially higher rates because you're older). If you have serious health issues when you re-apply, you might be denied altogether. The one exception to this is if you get a policy like MPP through a mortgage broker. MPP is portable.
One of the biggest cons of CLI is that underwriting is essentially re-done once you make a claim (unlike term insurance arranged through an agent where you take health tests in advance).
“That means after you die...there is [another] test to determine if you qualify for insurance,” So explains. “The insurance company will look through your application to see if there’s anything in there that contradicts your [stated] medical history. If they do find something, they have the right to deny the claim.”
There are clear arguments in favour of CLI: ease of approval and occasional cost savings being two of the main ones.
However, only a careful review of your life circumstances and options will determine whether CLI comes out ahead of term life insurance.
Getting a term life quote ahead of time could save you the last-minute pressure of deciding whether or not to add creditor life insurance to your mortgage. The cost difference and payouts could be meaningful, so you owe it to yourself to research ahead of time.
Reader note: This is general information and not insurance advice. Please consult a licensed insurance agent for details specific to your case.