Mortgage life insurance is sold by mortgage lenders and promises to pay off your outstanding mortgage (up to a maximum amount) if you die or suffer ill health or injury that prevents you from being able to work and earn money.
It is also referred to as Mortgage Protection Insurance or simply as Mortgage Insurance.
This insurance is very different from the CMHC Mortgage Insurance that home buyers with a down payment of less than 20% are required to purchase.
When we got approved for a mortgage, the mortgage advisor tried to convince us to opt in for mortgage insurance as well. Of course, I declined it right away.
I remember her looking me in the eye (my spouse was present) and saying: “Enoch if you die suddenly, how will your family (wife and kids) be protected? As the primary provider, you don’t want them getting saddled with your monthly mortgage obligations, eh?”
I paraphrase, but you get the gist. Anyway, I responded with another “No” – emphatic this time.
Having declined the insurance coverage, we were required to sign a document indicating that we had opted out of the mortgage life insurance offered by the credit union and understood the risks associated with our actions.
On our way out, the mortgage advisor asked us to contact her ASAP if we changed our minds.
Okay, here’s one of the issues with mortgage life insurance products and why mortgage advisors vigorously promote and if necessary, shame you into buying it: they get bonuses and/or are significantly compensated for selling it.
Yes, it makes sense to have insurance that ensures your family is protected and mortgage-free if anything bad happens; however, an individual term life insurance may serve your needs better.
Mortgage insurance vs. term life insurance? Which is better?
Why I Declined Mortgage Life Insurance
1. It is too Expensive
Mortgage life insurance premiums are often much more expensive than a term life insurance policy. For example, in our case, we could get term life insurance for $42 per month, while a mortgage life insurance with similar coverage was offered to us at close to $100 per month.
Yes! More than double the cost of the term life insurance – so you see why it was a no-brainer to go with life insurance!
2. Offers a Declining Benefit
As the years go by and you pay down your mortgage, your outstanding mortgage balance decreases. However, you continue to pay the same mortgage insurance premium.
For example, say you started with a $450,000 mortgage and now have a balance of $390,000 after 5 years. If your initial monthly mortgage insurance premium was $125 per month, it will stay the same despite your lower mortgage balance 5 years later.
Essentially, what this means is that your mortgage insurance benefit (coverage) declines in value even though you are paying the same amount in premiums. With life insurance, your coverage stays the same over the term of the policy.
3. The Bank is the Main Beneficiary
Unlike term life insurance, where surviving beneficiaries get paid if something happens to you, for mortgage insurance, the bank is both the insurer and the beneficiary.
Of course, your family will still be mortgage-free; however, with mortgage insurance, they have no control over the funds paid out from your mortgage insurance.
For life insurance, surviving beneficiaries get paid and have the flexibility to choose what they use the funds for.
4. No Discounts For Healthy Living
Insurance companies offer preferred (cheaper) rates to individuals with excellent health (e.g. non-smokers) or based on gender (females).
However, for mortgage insurance, there are no preferred rates or discounts available for being or staying healthy. It simply doesn’t count!
5. It is Not Portable
Your mortgage insurance is tied to your current mortgage. If you decide to move your mortgage to another bank or buy a new house, your mortgage insurance is not transferable and you will need to reapply.
However, term life insurance is not affected if you change mortgage lenders, or buy a new house. You even have the option of converting it to permanent life insurance later.
6. Underwriting Caveats
Underwriting aka “acceptance of liability” usually starts after your term life insurance policy is approved.
Insurance companies assess your risk based on parameters including your age, health (may ask you to complete a medical check-up), lifestyle, etc., and they base your premium on their assessment. There is a fair guarantee that if something goes horribly wrong, they will pay out.
However, for mortgage insurance, this may not be the case if the insurance is subject to “post-claim underwriting.” What this means is that they validate your insurance qualification after a claim is made and may decide that you didn’t qualify for coverage to start with.
7. After The Mortgage is Paid Off
What if you decide to pay off your mortgage early to save on interest? What happens to your mortgage insurance?
Well, nothing actually; it just simply ends i.e. no further coverage.
Compare this to life insurance. If you had term life insurance for 20 years and paid off your mortgage in 10 years, your life insurance coverage is not affected and stays in place until the end of your policy term. And you also have the flexibility to cancel it at any time.
Insurance is a great tool when used right. For peace of mind, it’s advisable you have some type of insurance in place to protect your dependents if something happens to you.
For most people, life insurance probably offers more coverage at a better cost. However, if you’re unable to qualify for life insurance (e.g. due to a disability, health issues, etc.), mortgage life insurance is an option to consider.
If you want to pay low life insurance premiums in Canada, check out PolicyMe, an online platform for obtaining life insurance quotes in Canada.