Mortgage Life Insurance vs. Term Life Insurance

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by Enoch Omololu

Updated

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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. individual life insurance? Which is better?

is mortgage life insurance worth it?

Related: Mortgage Broker or Big Bank: Factors To Consider

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 were able to 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.

Related: PolicyMe Review – Find the Best Life Insurance Quotes

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 pay 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.

Final Thoughts

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 for any reason 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 are looking to pay low life insurance premiums in Canada, check out PolicyMe, an online platform for comparing life insurance quotes in Canada.

Buying a house soon and looking for some of the lowest mortgage rates possible? check out IntelliMortgage for the best mortgage rates available in your area!

Also read:

Which is better? Mortgage life insurance or term life insurance? Let us know your thoughts in the comments.

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Author

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Enoch Omololu

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch has a passion for helping others win with their personal finances and has been writing about money matters for over a decade. His writing has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, Financial Post, Toronto Star, Credit Canada, MSN Money, National Post, CIBC, and many other personal finance publications.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO, monitors his credit score for free using Borrowell, and earns interest on savings through EQ Bank.

2 thoughts on “Mortgage Life Insurance vs. Term Life Insurance”

  1. This was a well outstanding information you have shared on this page about the mortgage life insurance worth because the 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 for any reason 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.
    Thanks.

    • To Sia Online: You are wrong to claim that mortgage insurance is the option for people with health issues. Mortgage insurance is post underwritten – meaning that when the time to make a claim comes they will then deny you due to not disclosing your illness at application. In fact, in a lot of states down south, post underwritten products have now been banned.

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