Mortgage Life Insurance (also known as Mortgage Protection Insurance) is an insurance policy that helps to ensure that your dependents are covered if you die before paying off your mortgage debts.
If you are buying a new home, and have just closed on your mortgage, then congratulations on being a homeowner. But what happens if you die before you can pay off your mortgage? Will your family (spouse and kids) be saddled with paying off your mortgage balance?
Mortgage Life Insurance is a simple and convenient way to protect your family’s future if you pass away. Your mortgage advisor might have told you about the mortgage life insurance, and you are left unclear whether you need it or if there are other options.
In this post, I will talk about what mortgage life insurance is, how it works, how much it costs, its benefits and downsides, and how it compares to term life insurance.
What is Mortgage Life Insurance?
Mortgage life insurance, also called mortgage protection insurance, is a popular type of life insurance in Canada offered through banks affiliated with lenders or independent mortgage brokers. It is a policy designed to repay mortgage debts and associated costs in the demise of the mortgage holder.
Mortgage life insurance is offered to protect the mortgage lender if you die or cannot continue your mortgage payments due to illness or injury.
Suppose you have dependents who might stay in your house after your death but will not be able to continue your mortgage payments. In that case, the insurance policy covers them by paying off the mortgage debts and freeing them of the responsibility.
With mortgage life insurance, you can sleep peacefully at night knowing that your dependents will be able to stay in your home in the event of a tragedy.
Mortgage payments stop at your death, and your family doesn’t have to worry about paying a mortgage they can’t afford without your income.
Is Mortgage Life Insurance The Same As Mortgage Default Insurance (CMHC)?
Mortgage life insurance is very different from Mortgage default insurance (also known as Mortgage Loan Insurance) offered by the Canada Mortgage and Housing Corporation (CMHC).
While the mortgage life insurance isn’t mandatory, the CMHC mortgage insurance is mandatory, and it is required when the down payment on a home you want to buy is less than 20%.
The CMHC is designed to protect the lender if you cannot make your mortgage payments.
How Does the Mortgage Life Insurance Work?
You pay a monthly or annual fee called a premium. Your premium is determined based on your age and the amount of your mortgage. The premiums are either paid separately or added to your regular mortgage payments.
The amount of your payout (the lump sum paid for the mortgage after your demise) depends on your outstanding mortgage amount.
As you pay off your mortgage regularly, the payout decreases slowly, but the monthly premiums remain the same throughout your insurance term.
There are two types of mortgage life insurance: decreasing term insurance and level term insurance.
The decreasing term insurance offers an insurance policy where the size of the policy decreases with the outstanding balance of your mortgage until both reach zero.
In contrast, level-term insurance offers an insurance policy where the size of the policy doesn’t decrease.
Benefits of Mortgage Life Insurance
Mortgage life insurance pays off your entire mortgage loan if you die. Your family and dependents don’t have to wonder about what might happen to your family home.
Also, mortgage life insurance provides you coverage with minimal underwriting. If you have a preexisting severe medical condition that will prevent you from buying traditional life insurance, you should consider mortgage life insurance. There is no medical examination or blood sample required.
Mortgage life insurance relieves your worries and lets you rest peacefully, knowing that your family and dependents will have a place to live if you die or are unable to work.
The policy pays off your mortgage, and your family will always have a place to live.
How Much Does Mortgage Life Insurance Cost?
The cost of mortgage life insurance depends on the insurance provider. Generally, your premium will be determined by:
- Your age
- The mortgage amount
- The premium rate
Your premiums remain the same all through your mortgage lifespan. Even when the mortgage amount reduces, the premiums will not decrease.
However, the premium goes up significantly with age. If you renew your mortgage with another lender and require a new policy down the road, the premium rates will likely be higher,
Different big banks in Canada have options for you to get mortgage life insurance. You can get it directly from the bank or an affiliated insurance company.
The difference between each bank’s mortgage life insurance is the maximum coverage you can apply for, your monthly premium rates, and the add-on types of coverage they offer.
1. TD Mortgage Life Insurance
TD Bank offers mortgage life insurance coverage up to a maximum amount of $500,000 on your mortgage amount.
Their monthly premiums range from $0.10 per month for every $1000 coverage for Canadians aged 18-30.
The monthly premiums rise based on age, up to $1.64 for every $1000 in coverage for Canadians aged 66-69.
2. Scotia Mortgage Life Insurance
Scotiabank offers coverage of up to $1,000,000 on your mortgage. Their monthly premiums begin at $0.11 for every $1000 for Canadians aged 18-30. It rises progressively, all the way to $1.54 for every $1000 for Canadians aged $1000.
3. RBC HomeProtector Insurance
The Royal Bank of Canada (RBC) offers mortgage life insurance that covers up to $750,000 on your mortgage.
With RBC, you can get quotes through their website to know how much it will cost you to get mortgage life insurance.
RBC will calculate the monthly premiums based on how much coverage you want to apply for and your age at the time of application.
4. CIBC Mortgage Life Insurance
CIBC offers you mortgage life insurance coverage of up to $750,000 to pay off your mortgage debts.
Depending on your age and the number of borrowers being covered, their monthly premiums range from $0.08 to $1.62. At CIBC, monthly premiums are added directly to your mortgage payments.
5. BMO Mortgage Protection Insurance
BMO offers coverage up to $600,000 on your mortgage. With BMO, you can get a quote on their website to know how much it will cost.
At BMO, either the primary borrower or the co-borrower can apply for mortgage life insurance coverage.
Is Mortgage Life Insurance Worth it?
Generally, mortgage life insurance is ill-advised.
Yes, you need an insurance policy that ensures your family and dependents are protected and mortgage-free if anything happens to you, but mortgage life insurance is not a good pick. Here’s why I say so.
1. You are not the beneficiary- The bank is: With mortgage life insurance, your family has no control over the money paid from your insurance policy. Your bank is the issuer and the beneficiary of the policy.
Your death benefit (amount paid out if you die) is paid directly to the bank to cover your outstanding mortgage balance.
2. Mortgage life insurance only covers your mortgage: Mortgage life insurance doesn’t give your family or beneficiaries the flexibility to use your insurance payout benefits for any other purpose besides the mortgage.
Though your family is mortgage-free, they may still face financial challenges in your demise, and mortgage life insurance does not help them with these financial challenges.
3. The insurance doesn’t transfer with you if you change lenders: If you choose to change your mortgage lender or move your mortgage to another bank, you cannot transfer your mortgage life insurance.
You will need to reapply because your mortgage life insurance is tied to your current mortgage.
4. Very Expensive: Mortgage life insurance is much more expensive than other insurance policies. You can expect to pay high mortgage life insurance rates.
The insurance policy does not even have regard for healthy living. There are no preferred rates or discounts for individuals with excellent health or based on gender.
5. Decreasing Benefits: The payouts from mortgage life insurance decrease over time. Your insurance policy’s potential benefit decreases with every mortgage payment you make. However, your premiums remain the same.
6. Age restrictions: Your mortgage life insurance application depends on your age and won’t be available after a certain age.
If you are 45 years or younger, you might get a 30-year mortgage life insurance policy from some insurers and only get a 15-year insurance policy if you are 60 years or younger.
Alternative Ways To Protect Your Mortgage (Term Life Insurance)
Term life insurance is a far better way to protect your mortgage while also protecting your family and dependents. Term life insurance pays money to your family and estate if you die while covered under the policy.
Unlike mortgage life insurance which is restricted to paying off your mortgage debts, the money from term life insurance can be used by your beneficiaries however they see fit.
Your family can use the money to cover your funeral costs and pay for post-secondary tuition, mortgage debt, credit card debt, or other expenses.
Your life insurance isn’t linked to your mortgage and can be purchased for a term unrelated to your mortgage lifespan.
Term life insurance is more flexible and can work for your changing needs. You can make significant changes to your personal life insurance policy to suit your family’s financial situation without worrying about heavy fees.
However, the main difference is that mortgage life insurance pays off your mortgage balance, which decreases over time as the mortgage is paid down.
But term life insurance coverage stays the same and is not linked to your mortgage.
Mortgage Life Insurance vs Term Life Insurance
Mortgage life insurance and term life insurance are a bit similar as they can both give your family protection for your mortgage if you were to pass away.
However, mortgage life insurance ties your premiums to your current mortgage amount. The premiums remain the same till the mortgage is paid off, even when the outstanding principal on the mortgage declines.
If you pass away, the payout benefit is the amount left on your mortgage and will be paid directly to your lender, not your spouse or kids.
The term life insurance grants you control and flexibility to choose the benefit amount and the term you want. You can choose the term length of your term life insurance policy, whether 10, 20, or 30 years.
If you die during your policy term, a tax-free lump sum benefit is paid to your family and beneficiaries, which they can use for whatever makes sense the most at the time.
If your mortgage debt is almost paid off, your beneficiary can use the money for education or other living expenses to reduce your family’s financial hardship.
Also, term life insurance premiums are more affordable than mortgage life insurance premiums. There is usually no underwriting for mortgage life insurance and you have to pay for the assumed risks, regardless of your health status.
However, term life insurance involves an underwriting process to ascertain your risk level and give lower premiums. For example, PolicyMe offers an average term life insurance of $500,000 coverage amount for a 35-year-old non-smoking male over a 20-year term for only $31.42 per month.
Whereas, if you opt for mortgage insurance of the same amount, you will be charged up to $50 for monthly premiums.
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Final Thoughts on Mortgage Life Insurance
If you have a mortgage to pay off and a family to take care of, you would need protection in case something happens to you.
While mortgage life insurance is recommendable, you probably don’t need it.
You would be better off with a term life insurance policy. You can get flexibility and control with lower premiums with term life insurance.
FAQs on Mortgage Life Insurance
Should you cancel life insurance when the mortgage is paid off?
No. when your mortgage is paid off, you might have other expenses, like education costs for your kids or a retirement fund for your partner. You can continue making payments for life insurance.
How much is mortgage life insurance monthly?
A formula calculates the cost of a mortgage insurance policy, taking into account your age and the principal amount of your mortgage.
How long do I need mortgage insurance?
The length of your coverage for your mortgage depends on many factors, like the amortization period of your mortgage and the mortgage principal.
What happens to your mortgage when you die in Canada?
If you die, your mortgage is attached to your home. The outstanding mortgage balance goes to whoever takes over the house. If your house transfers to your spouse, they will take responsibility for monthly mortgage payments.
