This article has been updated from a previous version.
Imagine securing your family’s future with a single decision. Mortgage life insurance isn’t just a policy. For many, it can be a peace of mind, ensuring your loved ones can stay in their home, no matter what life throws your way.
However, there’s a caveat: Just like the extra warranty a salesperson might try to sell you when you purchase a laptop or refrigerator, mortgage life insurance is an “add-on” product that boosts the lender’s profits.
This doesn’t mean that insuring your mortgage is a bad idea—in fact, it’s a smart move. But it’s equally important to recognize that your lender might offer you an overpriced mortgage insurance product.
Here’s everything you need to know about this coverage, including a comparison with other alternative insurance types to help you find the best fit for your lifestyle.
What is mortgage life insurance?
Mortgage life insurance is a type of term ‘add-on’ insurance offered by mortgage lenders to homebuyers and homeowners when signing a new mortgage or renewing an existing one. Its primary purpose is to cover mortgage payments if a primary income earner dies or becomes disabled, ensuring the home remains protected if the remaining principal cannot be paid.
Related: Canadians concerned about debt: What it means for future mortgage trends
How does mortgage life insurance work?
Mortgage life insurance covers the outstanding mortgage amount in the event of death or disability. Unlike other insurance types, mortgage life insurance can't be combined with other policies you may have.
While mortgage life insurance is not mandatory in Canada — meaning lenders cannot require you to purchase it to obtain a mortgage — it can be a valuable safeguard in unforeseen circumstances.
Bank-offered mortgage life insurance policies are non-transferrable, so they cannot be switched to another lender. This means that if you move before the end of your insurance term, your coverage cannot be transferred to the new property.
Premiums are fixed and not based on individual factors like health or age, meaning no discounts for healthier or younger applicants. Additionally, unlike life insurance, which is not subjected to taxes, mortgage insurance premiums are charged provincial sales tax (PST).
One thing that customers should consider is that the coverage, and the premiums, last for the length of the mortgage term, with premiums paid over this period. Essentially, even as your mortgage balance decreases — subsequently reducing your coverage — you will still have to pay the same premiums, which may not seem ideal or fair.
However, the mortgage life insurance policy only lasts as long as your mortgage term, not the full amortization period. For example, if you have a 5-year fixed-rate mortgage, your mortgage insurance will also last for five years. When you renegotiate your mortgage, you will need to renegotiate your mortgage insurance as well.
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Claims processing for mortgage life insurance
Post-claim underwriting is a practice where the insurance company thoroughly reviews your eligibility for coverage, but only after a claim is made. This means that if you submit a claim, the insurer will then check to ensure you qualified for the coverage at the time of the application.
If any inconsistencies or issues are found, the insurer can deny the claim, even if you have been paying premiums regularly. This can be particularly problematic in critical situations, such as the death of the primary breadwinner, leaving families without the expected financial support. While premiums may be refunded, the immediate financial burden remains.
To avoid the pitfalls of post-claim underwriting, it’s advisable to work with a licensed insurance broker who can help ensure that your policy is properly underwritten before purchase.
Learn more: Mortgage debt can hurt you (physically)
Is mortgage life insurance the same as mortgage default insurance?
The terms mortgage life insurance and mortgage default insurance might sound similar, but they’re different. Mortgage life insurance protects the borrower’s family by paying off the mortgage if the borrower dies. Mortgage default insurance protects the lender if the borrower defaults on the loan.
The beneficiary of mortgage life insurance is the borrower’s family. The beneficiary of mortgage default insurance is the lender.
Secondly, while mortgage life insurance is optional, mortgage default insurance is mandatory for down payments less than 20%. This type of insurance allows buyers with smaller down payments to enter the housing market.
Read more: Saving for a down payment
Does it ever make sense to get term life insurance to pay off your mortgage?
Mortgage life insurance is not your only option if you want to cover your mortgage commitments and provide peace of mind for your loved ones. You may also consider taking out term life insurance for the length of your mortgage.
In Canada, term life insurance provides a fixed death benefit that remains constant throughout the policy term, offering your beneficiaries a tax-free lump sum. This sum can be used to pay off the mortgage, cover living expenses, or invest for the future. With mortgage life insurance, the lender is the beneficiary, not your family, limiting the flexibility of how the funds can be used.
Most term life insurance policies in Canada also offer a conversion privilege. This feature allows you to switch your term life insurance policy to a permanent one without needing a medical exam. This means you can secure life insurance at healthy rates in the future, even if you become uninsurable. Such benefits are not available with mortgage insurance.
If your term policy is nearing its end and you still have a mortgage, converting to a permanent policy ensures continued coverage. This way, your beneficiaries will still receive a death benefit to cover the mortgage, even if you outlive the original term.
Some other benefits include:
- Discounts are available based on your health and your family history.
- Premiums are taxed at a much lower rate.
- It’s more flexible – you can change mortgage lenders and take the coverage with you if you move homes, or you can convert a term policy into a permanent policy.
No matter what type of insurance you decide to get to protect your assets, make sure to consult with a licensed insurance broker (not just your mortgage lender) to receive the best advice on coverages.
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