Mortgage Life Insurance

What is Mortgage Life Insurance?

Mortgage life insurance is an added cost by the financial institution (or lender) who your mortgage is with which is supposed to provide life insurance coverage to pay off the outstanding mortgage amount if you pass away. It is usually offered by many banks as part of the mortgage buying process.

However, while most banks will request that you purchase mortgage life insurance to cover the outstanding debt, they cannot require that you purchase the insurance coverage with them.

Most Canadians are unaware that they have the flexibility to shop around for mortgage life insurance as there are better products, as well as better rates (meaning lower cost) compared to what the banks will typically offer you.

True mortgage life insurance is actually what is known as “decreasing term life insurance”. Your premiums (the cost of the policy) stay level, but your life insurance coverage amount decreases as your mortgage balance gets paid down. As you make a payment towards your mortgage balance, the amount of what you owe (the principal of the mortgage) is decreased which means that the amount of insurance coverage the bank is providing is also decreasing.

This is the type of mortgage life insurance you would find through the bank or lending institution for your mortgage. If you are using a mortgage broker, they offer a similar product which is called Mortgage Protection Plan (MPP) which is underwritten by Manulife. Even though it may seem like the insurance is provided by the bank, it is usually a large insurance providing the coverage in the background.

The idea of mortgage life insurance is that the mortgage lender would step in to pay off the balance of your mortgage at the time of death. You pay an additional premium on top of your mortgage payments for this insurance coverage. Some financial instructions will also offer additional insurance coverages such as mortgage disability insurance or mortgage critical illness insurance.

Benefits

Although we highly recommend purchasing an individual life insurance policy (such as term life insurance) over mortgage life insurance offered by your bank, there are some benefits to purchasing a mortgage life insurance policy.

• Insurability. If you have had issues in the past getting approved for a individual life insurance policy from a life insurance company because of past or currently health conditions, mortgage life insurance could provider to be a good alternative. We would recommend speaking with one of our agents first because no medical life insurance is also available which is still a much better alternative compared to mortgage life insurance.
• Convenience. The premiums of the policy are usually attached to your mortgage payments so making payments are seamless and easy.
• Control. You can cancel the policy at any time with no penalties or fees. Most policies have a grace period of 30 or 60 days where you will be provided coverage, but if you decide to cancel in the first 30 to 60 days you will receive the premiums that you paid back. This allows you to get temporary coverage in place while you shop around for a term life insurance policy.
• Re-Financing. If you currently have mortgage life insurance and are refinancing or making changes to your mortgage with the same lender, you are typically able to continue your coverage with that same lender even if there has been changes to your health.

Overview

• Not Mandatory. It is not a mandatory requirement to purchase mortgage life insurance from the lender providing you with a mortgage.
• Coverage Decreases. The premiums stay level (fixed) even though your coverage decreases as you pay down the principal of the mortgage every month. This means the amount of coverage that you have is decreasing every month, but the bank still charges the same premium. Win for the bank, not you.
• High Costs. The costs associated with mortgage life insurance are typically high compared to comparable products such as term life insurance.
• The Bank is the Beneficiary. You are not allowed to choose the beneficiary as the bank is the beneficiary of a mortgage life insurance policy. Your beneficiaries do not physically receive any money in the event of death as the bank would just pay out the outstanding balance of the mortgage.
• Not Guaranteed. It is underwritten at the time of claim which means that the policy is not 100% guaranteed to pay out. The bank will decide if they are going to pay out when you make a claim.
• One Size Fits All. You need to revisit the policy every time you make changes to your mortgage or switch lenders. It is not a flexible product.

Is Mortgage Life Insurance Worth It?

If you currently have mortgage debt and want to ensure that your family or loved ones will receive your property, free of any debt (or a portion of the debt) than you should definitely consider having life insurance coverage in place to cover the balance of the mortgage.

Mortgage life insurance offered by the banks (as described above) is not worth the cost of the premiums if you are able to get a term life insurance policy instead. You should consider mortgage life insurance if you have been turned down for term life insurance and no medical life insurance from a life insurance company. Otherwise, don’t bother with it.

Examples of Mortgage Life Insurance

Scenario
A young couple has just purchased their first home and they want to make sure that the mortgage debt of $600,000 is paid off in the event that either of them pass away. The broker that they used to get a mortgage has offered them Mortgage Protection Plan (MPP) from Manulife. They are not sure if this is the right coverage for them and have started to research online as the premiums seemed to be quite high.

Recommendation
They should each purchase individually owned term life insurance policies from a reputable Canadian life insurance company. This will provide level premiums and level coverage for a period of time that they choose. They should consider a term length of anywhere between 20 to 30 years depending on their need. They should consult with a life insurance broker to review their options, pricing and companies to determine what is the best route for their family.

Example
Scott purchased a condo downtown Toronto Ontario and used his bank to get a mortgage on the condo to be able to purchase it. He has a spouse and a newborn which he does not want to leave the debt of the mortgage to in the event that he were to pass away. His bank offered him mortgage life insurance on the outstanding balance of his mortgage. The mortgage life insurance offered by his bank is supposed to pay off the outstanding mortgage balance in the event that he were to pass away. Although many banks make it seem mandatory to purchase this insurance, the majority of the time it is not. Continue to read on to find out why we do not recommend purchasing this type of insurance from banks.

Mortgage Life Insurance vs. Individual Life Insurance

As previously mentioned, mortgage life insurance is typically not a mandatory requirement to purchase if you have a mortgage, although most banks will make it seem like it is mandatory.

Rather than purchasing mortgage life insurance through your financial institution, you will most likely find that a term life insurance policy is a much better purchase for a number of reasons.

Many Canadians will purchase a 10, 20 or 30 year term life insurance policy from a life insurance company instead of purchasing mortgage life insurance from the bank. Term life insurance offers level premiums (the cost of the policy) and a level death benefit (the coverage amount) for the length of the term that you choose (e.g. 10 years). This means more options, flexibility, a better product and more often than not, lower premiums!

Did You Know? RBC Insurance and Industrial Alliance even offer a term life insurance policy where you can choose the exact amount of years for the length of your term policy. For example, you can purchase a 13 year term to match the remaining years of your mortgage.

Here’s a quick rundown of the main differences between mortgage life insurance and individual term life insurance.

Mortgage Life Insurance	Term Life Insurance
Premiums are usually higher for most Canadians when compared to term life insurance policies.	Premiums are typically lower when compared to mortgage life insurance. Use our online quoter to compare for yourself (choose 10 or 20 year term).
The coverage amount (death benefit) decreases with your mortgage. As your mortgage principal gets paid down, so does your life insurance coverage.	The coverage amount (death benefit) remains level for the length of the term. For example, a 20 year term has level coverage for 20 years. It does not decrease with your mortgage balance.
The premiums (cost of the policy) are level for the term of your mortgage. The “term” is how long your mortgage rates are fixed for (usually five years) not the length of your mortgage.	You can choose how long your rates are guaranteed level/fixed for. The shortest term available in Canada is a 10 year term. Most people purchase 20 year terms for their mortgage.
If you switch your mortgage to a new lender or bank, you will be required to requalify based on your health and age at that time. You may not qualify if your health has changed. Premiums will also increase because of your age.	You qualify at the time of application and your policy will not change as long as you are paying the premiums of the policy.
Mortgage life insurance has post claim underwriting. This means that they will determine if you are approved for a claim when you make a claim. In essence, you could be paying for your insurance and still get denied at claim time. This has happened to many Canadians.	An individually owned term life insurance policy (what we sell) is underwritten when you submit the application. This means that you will know if you are approved or not at the time of applying. You do not need to worry about a claim being denied after you are approved.
No conversion options. At renewal (usually every 5 years with mortgages) you’ll see premium increases. Limited flexibility and policy options. Definitely not recommended.	You may convert your term life insurance policy to a permanent life insurance policy with no medical exam, at your discretion up to a specified age (usually age 70 but it depends on the insurance company). Policy options are very flexible and many companies to choose from.

Cost Comparison – Mortgage Life vs. Term Life Insurance

The cost of mortgage life insurance depends on the bank or lending institution that you are purchasing it from. Every bank has different premiums for mortgage life insurance. If you are using a mortgage broker, they will usually offer you mortgage insurance from Manulife who has a product called MPP, Mortgage Protection Plan. This product is not the same as Manulife’s term life insurance product.

Mortgage Protection Plan is just a type of mortgage life insurance offered by Manulife to mortgage brokers so that mortgage brokers have some kind of product to offer their clients. You want to steer away from this product if possible and replace it with a term life insurance policy.

For our cost comparison of mortgage life insurance and term life insurance, we are going to use RBC Bank’s mortgage life insurance product which is called HomeProtector. This is the mortgage life insurance product that RBC offers if you have a mortgage with them. RBC also offers individual term life insurance (lengths from 10 to 40 years) which we will compare it to.

$500,000 Coverage	RBC HomeProtector	RBC 20 Year Term
Male – Age 35	$70.20	$32.63
Female – Age 35	$70.20	$24.26
Male – Age 45	$156.20	$75.42
Female – Age 45	$156.20	$53.37

*Term life insurance rates are monthly and based on standard health, non smoker from RBC Life Insurance Company.
**Rates were quoted November 2020 and are not guaranteed. Final rates are determined after an application has been submitted.

The pricing for RBC HomeProtector is the same regardless of gender. If you click on the pricing you will see the actual quote RBC’s website.

As you can see, the cost for 20 year term life insurance from RBC Insurance is more than 50% less when compared to RBC HomeProtector.

How much do you like your banker now? To be fair, most bankers are not aware that the product they are offering you is overpriced and that there are superior alternative options available.

Helpful Links

• Global News – Banks Sell Mortgage Insurance, But Independent Experts Say You Shouldn’t Buy It
• The Globe & Mail – Do You Need Mortgage Insurance?
• Student Loan Hero – 3 Reasons You Should Skip Mortgage Protection Insurance
• Canada Revenue Agency – Mortgage Life Insurance: Rights & Responsibilities
• Investopedia – Why You Don’t Need Mortgage Life Insurance

Summary

Mortgage life insurance should be avoided if you are able to qualify for term life insurance instead. Term life insurance offers lower premiums and a much superior product. Always do your research before purchasing any type of insurance product to compare costs, benefits, drawbacks and policy options.

Feel free to contact us to discuss your needs to determine what is best for you and your family.

Frequently Asked Questions

What is mortgage life insurance?

Mortgage life insurance is a type of life insurance policy that is specifically designed to pay off outstanding mortgage debt (or a portion of it) in the event of the mortgage holder’s death. Mortgage life insurance is typically offered as an option to homebuyers as part of their mortgage application, however it is not required by the mortgage lender.

Do you need mortgage life insurance?

While many mortgage lenders may suggest that mortgage life insurance is a necessity, it is not mandatory. In many cases, a term life insurance policy covering the mortgage period is actually more beneficial. It should also be noted that if you do opt for mortgage life insurance, it does not need to be purchased through your mortgage lender, you are free to shop around and compare quotes.

How does mortgage life insurance work?

By paying an additional premium on top of their monthly mortgage payments, mortgage policy holders ensure that their outstanding mortgage debt will be paid if they pass away. There are two key things to understand about how mortgage life insurance works. First, the premiums are fixed, meaning that you pay the same fee every month to the insurer. Second, since you pay down your mortgage debt every month, the mortgage life insurance coverage effectively decreases. This means you are paying the same monthly premium for decreasing coverage.

Can I cancel my mortgage life insurance?

Yes, it is possible to cancel your mortgage life insurance policy without any penalties. Moreover, if you cancel your policy within 30 to 60 days (depending on the insurer), you are usually entitled to a refund on paid premiums.

Is mortgage life insurance worth it?

While mortgage life insurance may seem like a good option for covering what is most people’s most expensive investment, a term life insurance policy may actually be more beneficial. This is simply because the benefit for a term life insurance policy will not decrease over time. A mortgage life insurance policy is, however, a viable option for those unable to get a term life insurance policy.

Is life insurance mandatory for mortgages?

Though it is advisable to invest in some type of mortgage life insurance or term life insurance when taking on a mortgage, it is not a legal requirement for mortgage approval. Other types of insurance, such as home insurance and mortgage default insurance, may be required by the mortgage lender.