If you’re in the process of buying a house, you might be asked about whether or not you want to purchase mortgage life insurance protection. Getting coverage to protect your family in the event of your death seems to make a lot of sense.
However, term life insurance is usually a better choice (and usually the cheaper option too). Let’s talk about the pros and cons of mortgage protection vs. term life insurance.
How does mortgage life insurance work?
Mortgage life insurance is typically sold by banks or your mortgage broker. If you pass away while your policy is active, your insurer will promise to pay off what’s left of your mortgage balance so that your family can stay in the home.
Important side note: Mortgage protection insurance is different from insurance through the Canada Mortgage and Housing Corporation (CMHC), which protects your lender (not your family). To read more about this, click here.
How does term life insurance work?
Term life insurance acts in the same way as mortgage life insurance. if you pass away, your insurer guarantees that your total coverage amount (this is the amount specified in the policy contract) will be paid to your family in one tax-free lump sum.
Is mortgage life insurance a good idea?
Let’s set things straight: Mortgage life insurance is basically protection for your bank. It covers the insurance premiums they have to pay to be protected against the risk that you will die and default on your loan. And because of this, there are a few reasons why we’re not a big fan of it.
Here are the reasons mortgage life insurance may not be a good idea:
- Mortgage life insurance is more expensive
- Your bank gets the payout, not your family
- If you change mortgage providers, your mortgage life insurance doesn’t automatically move with you
- Mortgage life insurance doesn’t come with advice
1. Mortgage life insurance is more expensive
Mortgage life insurance is easy to buy (on purpose)! Answer a few simple questions and you are approved on the spot. But you know that if you get to avoid peeing in a cup, there’s gotta be a catch.
When your insurance company doesn’t know anything about your medical history, it’s extremely difficult for them to price your policy. It also puts them in a position that’s risky because your chances of dying soon could be sky-high. So what do insurers do? They make up for the lack of information by just assuming your health is poor and charging you higher premiums. There’s the catch.
We tested this theory by comparing real mortgage life insurance and life insurance prices. Here is what we found.
Mortgage life insurance vs. Term life insurance rates
|$500,000 of TD mortgage life insurance||$500,000 of term life insurance|
|Male, aged 30||$70/month||$30/month|
|Female, aged 30||$70/month||$22/month|
|Male, aged 40||$150/month||$49/month|
|Female, aged 40||$150/month||$35/month|
|Male, aged 50||$270/month||$130/month|
|Female, aged 50||$270/month||$86/month|
And if you think that’s bad, wait until you hear this: with mortgage life insurance, your benefit amount decreases as you pay off your mortgage, but the premiums remain the same. So over time, you get less and less for what you pay for. With life insurance, the amount of coverage doesn’t drop over time (even if you pay off your mortgage).
2. Your bank gets the payout, not your family
In the unfortunate event that you die, your family may not want to pay off your mortgage right away. And even if you don’t kick the bucket, you may want to move to another city to be closer to family. You may even be able to afford your mortgage payments and prefer to use the money for other expenses. Unfortunately, mortgage life insurance doesn’t give you this flexibility. It doesn’t leave much room for life to happen.
And that’s not all. With a mortgage insurance policy, your beneficiary is your bank (the same one that charges you every fee under the sun and opens from only 10 a.m. to 3:30 p.m. Monday to Friday). This means that your death benefit goes straight to your bank, skipping right over your loved ones you really want to protect. With life insurance, you get to choose your beneficiary, and they get more options to spend the money on the expenses they need.
3. If you change mortgage providers, your mortgage life insurance doesn’t automatically move with you
If you move your mortgage to another lender or bank, you’ll have to be underwritten all over again. You’ll also be subjected to new rates that are almost always higher (of course, they are). So if you get sick between when you buy your mortgage life insurance and when you move your mortgage, you can end up paying astronomically high rates. (As if having a serious illness isn’t bad enough.) With life insurance, you can take your policy with you if you transfer your mortgage to another company, and you won’t no need to reapply or prove that you’re still healthy.
4. And most importantly, mortgage life insurance doesn’t come with advice
This one hits closer to home for us at PolicyMe. If you already have life insurance coverage, you may already have sufficient (or partial) coverage for your mortgage. But only a proper needs analysis can determine this. In just 5 minutes, you can complete a needs analysis with our proprietary life insurance checkup. With it, we’ll make sure you’re getting covered for the right amount and with the right policy.
More questions? Check out these articles to learn more about mortgage life insurance:
Why mortgage life insurance may be a bad idea?
Skipping on mortgage life insurance may sound risky (and not in a theme park thrill ride kind of way). But it doesn’t mean you have to go without coverage. After all, term life insurance is almost always the better option, and it isn’t as expensive as you may think (more on this here).
So be careful. Banks generally try to sell you mortgage life insurance when you sign up for a new mortgage. And if you agree to it, they’ll add a hefty insurance premium onto your monthly mortgage payments. That’s why it’s always important to make sure you know what you’re signing up for.
When might mortgage life insurance make sense?
Mortgage protection may be a good option if you have a health condition and don’t qualify for term life insurance but still need coverage for your mortgage. In general, the underwriting requirements for mortgage protection are less stringent than those for term life insurance.
When is the best time for Canadians to get life insurance?
The best time to get life insurance is when someone depends on you. For most people, this is when they get married or when they start having kids.
We know what you’re thinking: “But I just got a mortgage, and having kids isn’t cheap! How am I supposed to afford life insurance?"
Fortunately, the younger you are, the more affordable your life insurance will probably be. In most cases, it’s smart to lock in a low monthly rate when you’re young because it’ll stay at that price for the entire term of your policy.