Mortgage Life Insurance
Imagine that you’re buying your first home, you sit with the mortgage broker or someone from your bank and they are detailing your payments. They often tell you an amount for the principal, interest and the mortgage insurance for each payment.
Did you ever wonder what insurance they are talking about? It isn’t the Canada Mortgage and Housing Corporation (CMHC) insurance that is needed for down payments smaller than 20%. It is a life insurance add-on and even though it is often pitched as part of the payment package, you don’t need to take it and should consider a standalone term life insurance policy instead.
Mortgage life insurance is pretty simple when you think about it.
It is life insurance that the institution lending you money puts on your life to make sure that if you die they get their money. It has nothing to do with your family’s financial security. The fact that you may end up with a mortgage-free home is a side-effect to them getting paid in full. Consider what you are being asked to pay for. The premium is set at the time that you apply for the mortgage so if your mortgage is for $500,000 you pay for that much insurance.
The problem is that unless you die before your first payment, the benefit amount that they pay will never be what you are paying for. You pay level premium amounts for decreasing coverage because you pay down the principal of your mortgage with every payment.
The second thing to consider is that typically the cost of mortgage life insurance is high. If you are in good health you can typically get a term life insurance policy for much less than the premium the lender charges. You also need to think about the fact that if five years into your mortgage you change lenders, you need to re-apply for mortgage life insurance with a new company. You will be five years older so the cost is that much higher.
The final (and most important) thing to consider is what happens when a claim is made. Life insurance purchased from an insurance company has underwriting done at the time of the application. Assuming that you are truthful on the application and you have been paying the premiums, the policy will be in force and the death benefit will pay out should you pass away. This is not the case with all mortgage insurance policies.
Mortgage life insurance is subject to something called “post-claim underwriting”. This means that when you make a claim they are entitled to look back at when you applied and decide at that time if they will pay out your claim or not. Mortgage insurance is not guaranteed to pay out.
To Summarize The Above…
- Mortgage insurance costs more than term life insurance (in most cases)
- Mortgage life insurance is not 100% guaranteed to pay out whereas term life insurance is guaranteed to pay out once approved.
- Mortgage insurance has the same monthly premium but your coverage amount decreases every month because you are paying down your mortgage balance. Term life insurance has a level death benefit and level premiums.
- You may have to re-apply for your mortgage insurance coverage every five years (or whenever you make changes to your mortgage and/or lender).
- You should always purchase term life insurance instead of mortgage insurance whenever possible.
A true life insurance policy insures a person, not a debt. Sure, we use mortgages and many other factors to figure out how much coverage is enough, but at the end of the day a life insurance policy provides your family with cash when they need it. If they want to pay off the mortgage that should be up to them, not a requirement. Opt for the plan that you know will pay the benefit and will probably cost you less as well.