Mortgage Life Insurance

Mortgage Life Insurance

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

However, while they can request that you have life insurance to cover the debt, they cannot require that you purchase insurance with them. You have the flexibility to shop for mortgage life insurance to get better products as well as better rates (lower cost). Most Canadians will purchase a term life insurance policy instead of mortgage life insurance.

True mortgage life insurance is actually what is known as “decreasing term life insurance”. Your premiums (cost of the policy) stay level, but your life insurance coverage amount decreases as your mortgage balance gets paid down. This is the type of mortgage life insurance you would find through the bank.

It should be known that you should be very careful as many banks make it seem like it is a mandatory requirement that you purchase mortgage life insurance from them. This is definitely not the case and it is mainly a sales pitch so that they can make a sale.

Instead of purchasing mortgage life insurance through the bank, you will find that a term life insurance policy is a much better purchase. Many Canadians will purchase either a 10, 15, 20, 25 or 30 year level term life insurance policy from a life insurance broker instead of purchasing mortgage life insurance from a bank. Term life insurance offers level premiums (cost) and level death benefit (coverage amount). This means more options, flexibility, better product and usually lower premiums!

Here’s a quick rundown of the difference between mortgage life insurance and individual term life insurance, using a 20 year term life insurance policy as an example.

Mortgage Life Insurance 20 Year Term Life Insurance
Premiums are typically much higher than term life insurance. Premiums are almost always lower. See the online quotes at the top of this page to compare quotes. It pays to compare!
Coverage amount (death benefit) decreases with your mortgage. Coverage amount (death benefit) remains level for the length of the term (e.g. 10, 20 or 30 years).
Premiums (cost of the policy) are level for the term of your mortgage. Important- the ‘term’ is how long your rates are guaranteed for – not the length of your mortgage. If you take out a 30 year mortgage, but have a term of 5 years (e.g. you lock your rates in for 5 years), then your mortgage life insurance rates are only locked in for the 5 years – not the 30 years. You can choose how long your rates are guaranteed level for. The shortest term length is 10 years. Most Canadians are purchasing 10, 15, 20 or 25 year term life insurance policies to cover their mortgage debt. Try to match the length of the term with the length of your mortgage.
You can be declined for new mortgage life insurance at the end of the term if you become unhealthy. You are effectively re-applying for new life insurance every time you renegotiate / renew your interest rate, re-finance your property or switch bank lenders. Insurability is determined at the start of the policy and cannot be revisited as long as you pay your premiums. This means that once your policy is in force you don’t need to worry about anything moving forward.
Most mortgage companies do not require an in depth health questionnaire or medical to approve your policy. This is called post-claim underwriting which means that they will determine if you are approved for a claim at the time of a claim. In essence, you could be paying them and get denied at claim time. This has happened to many Canadians (see CIBC Marketplace Video below). An individually owned term life insurance policy (the type that we sell) is underwritten at the time of application. This means that you will know if you are approved or not at the time of application. 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) if you are unhealthy, you can be declined with no recourse. 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 75 but it depends on the insurance company).

We touched above on something call ‘post claim underwriting’. In order to see the impact of what that term means, we encourage you to view the video clip on mortgage life insurance here: CBC Marketplace, – In Denial. (click on link or watch the video below).

In summary, for most of us 20 year term life insurance is a better insurance product, at a cheaper price, than bank provided mortgage life insurance. Shop the rates using our free, online life insurance quoter at the top of this page. You can compare over 20 companies instantly at no cost.

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