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?
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.
First of all, satisfaction is reportedly high (87%) 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% reported satisfaction with their claims experience, and 94% 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:
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% 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 RATESDOTCA 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:
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.