Buying a home is the biggest investment. But have you ever considered how it could impact your family’s financial security for decades? It is a common concern for many Canadian homeowners.
That is the reason why mortgage life insurance becomes a popular choice. However, before you decide to buy, it is important to understand all bout it. This guide from BestMO will clarify how this type of insurance works, how it compares to other financial protection options, and outline your rights.
What is mortgage life insurance?
Mortgage life insurance is an optional product that pays off your remaining home loan balance if you die while having an active mortgage. It can make sure that your family can stay in their home without a financial burden. Unlike life insurance, it is tied directly to your mortgage and is often offered by lenders during the home-buying process.
How does mortgage life insurance work?
Mortgage life insurance is a type of term life insurance, but it operates differently from traditional insurance policies. When you buy it, you pay a monthly premium, commonly added to your mortgage payment. If you die during the policy term, the insurance pays your remaining mortgage directly to the lender. The coverage amount decreases as you pay down your mortgage, but premiums stay the same.
Most applications receive quick approval with minimal health questions, and your monthly premium either gets added to your mortgage payment or billed separately. Coverage begins immediately upon approval.
If you decide to switch lenders, you will lose coverage and must reapply with the new lender. The coverage continues until you pay off the mortgage, reach the age limit, or pass away.
What does mortgage life insurance cover?
Mortgage life insurance only covers your outstanding mortgage, with no extra financial support to your family or to cover other debts or expenses. It means it has a death benefit that pays your exact mortgage balance upon death.
However, be aware that this product will not cover the following cases:
- Deaths during initial waiting periods (which vary by insurer).
- Pre-existing medical conditions that are not disclosed in the application.
- Suicide within the first two years.
- Death after reaching the age limit (between 70 and 71 years old).
Many providers offer additional protection options, such as mortgage disability insurance and mortgage critical illness insurance, which cover your mortgage payments if you are unable to work due to injury or illness. Additionally, job loss protection helps cover payments if you lose your job through no fault of your own.
How much does mortgage life insurance cost per month?
The monthly cost of mortgage life insurance depends on your age at the time of application and the amount of your mortgage. It usually ranges from $10 to $100 per month. However, it can be higher for larger mortgages or older individuals.
A healthy 30-year-old with a $300,000 mortgage might pay $45 monthly, while a 50-year-old with the same mortgage could pay $60 – $80 due to increased risk. Smokers or those with health conditions may face higher rates or limited coverage.
Larger mortgages also increase the premiums. For a $500,000 mortgage, a 30-year-old might pay $75 monthly, compared to $45 for a $300,000 mortgage. Additionally, policies with added features tend to be more expensive; basic mortgage life insurance is cheaper but only covers death.
What are your rights regarding mortgage life insurance?
Canadian law provides strong protections guaranteeing you are never pressured into buying mortgage life insurance:
- You cannot be denied a mortgage for refusing optional insurance: In Canada, you are not required to buy mortgage life insurance to qualify for a mortgage.
- You have the right to require clear information: Do not hesitate to clarify all costs and written documentation of terms. Make sure everything is presented in plain, understandable language.
- You can cancel coverage anytime: Some provinces offer cooling-off periods for reconsideration, though refund policies vary by insurer and province.
- You have qualified service from banks: The Canadian Bankers Association requires member banks to provide appropriate recommendations based on your situation. Then, they need to inform you if a product is not suitable for your needs. They must make their insurance code of conduct publicly available and train staff to explain products without using high-pressure tactics.
- You have protection from the Financial Consumer Agency of Canada: If problems arise, document all interactions with dates and names. Contact the institution’s ombudsperson first, and then escalate to provincial regulators if necessary. The Financial Consumer Agency of Canada handles federal complaints and can provide additional assistance.
Understanding your rights can provide you with peace of mind when deciding whether this insurance is suitable for you.
Pros and cons of mortgage life insurance
Knowing the 3 advantages of life insurance for mortgage below will show you how valuable it can be:
- Easy to qualify: It requires no medical exams or blood tests. Additionally, pre-existing conditions are often accepted, and approval can occur within minutes or hours. As a result, it is an ideal option for individuals with health issues who cannot obtain traditional coverage.
- Convenience: You get one-stop shopping with your mortgage. Premiums are included in mortgage payments, no separate bills to manage, and coverage starts immediately.
- Peace of mind: It guarantees mortgage payoff. So, your family can keep the home without estate complications, delivered as a tax-free benefit to the lender. The costs remain predictable with fixed premiums throughout the mortgage term, no surprise rate increases, and budget-friendly payment options.
However, you also need to consider the limitations of mortgage life insurance, which are:
- Decreasing coverage: Coverage shrinks while premiums remain level. It provides poor value in later mortgage years, with no benefit if the mortgage is nearly paid off.
- Higher costs: It is more expensive than term life insurance for healthy individuals.
- Limited flexibility: Your family has no option to use funds differently.
Carefully evaluating these trade-offs is the key to figuring out “Is mortgage life insurance worth it?” and helps you make an informed decision.
Where to get the best mortgage life insurance
Finding the best mortgage life insurance requires comparing options from multiple sources. Each business offers distinct advantages depending on your preferences. You can get mortgage life insurance in Canada mainly from:
Independent insurance companies
Insurance companies offer better options for value shoppers, those wanting portability, customization, and long-term planning. You will gain individual policy ownership and often better premium rates for healthy applicants. The downside is that you will face more applications and medical requirements.
Mortgage lenders
Through banks, credit unions, and trust companies, you will find the most convenient option. They are suitable for those who have health issues, urgent coverage needs, or prefer simplified billing. However, these policies are often more expensive and offer limited flexibility.
Online insurance brokers
Insurance brokers serve those who want comparison shopping, expert guidance, help with complex situations, or are time-pressed. They provide multiple quotes at once, professional needs analysis, claims assistance, and ongoing policy service.
Compare mortgage life insurance vs other insurance
Now, let’s explore how mortgage life insurance compares to other protection options to choose the right coverage for your family’s needs.
Mortgage life insurance vs life insurance
Traditional life insurance offers broader protection, more flexibility, control, and better value for protecting your family financially than mortgage life insurance.
| Feature | Mortgage Life Insurance | Life Insurance |
| Purpose | Pays off the remaining mortgage if you die | Provides a lump sum to beneficiaries |
| Payout Beneficiary | Your lender | Your family or chosen person |
| Value to Family | No | Full payout goes to loved ones |
| Coverage Amount | Decreases as you pay down your mortgage | Fixed or adjustable |
| Use of Funds | Only covers mortgage debt | Can be used for any purpose |
| Premiums | Often fixed but higher for limited value | Lower and offers more value |
| Portability | Ends if you refinance or switch lenders | Portable, independent of mortgage |
| Medical Underwriting | Often none at purchase, may be post-claim | Done upfront |
Mortgage life insurance vs mortgage protection
Their key differences lie in the coverage, premium costs, various claim triggers, and different benefit periods for each type of protection included. Mortgage protection insurance is a good fit if you want income or illness protection in addition to life coverage.
| Feature | Mortgage Life Insurance | Mortgage Protection Insurance |
| Purpose | Pays off the mortgage in case of death | Covers payments in case of death, disability, illness, or job loss |
| Payout Beneficiary | Mortgage lender | Usually pays the lender or directly toward payments |
| Value to Family | Yes | Yes |
| Coverage Amount | Matches declining mortgage balance | May match payments or the full balance |
| Coverage Types | Life coverage only | Life + Disability + Critical Illness + Job Loss |
| Cost | Moderate | Higher (more comprehensive coverage) |
| Eligibility | Easier to qualify (group plans) | May require more detailed underwriting |
| Flexibility | Less flexible, tied to the lender | More flexible, depending on the provider |
Mortgage life insurance vs mortgage default insurance
Mortgage life insurance covers death, while mortgage default insurance covers borrower default.
| Feature | Mortgage Life Insurance | Mortgage Default Insurance |
| Purpose | Pays off your mortgage if you die | Protects the lender if you default on your mortgage |
| Payout Beneficiary | Your mortgage lender | Your mortgage lender |
| Value to Family | Yes | No |
| Coverage Amount | Declines as the mortgage balance decreases | Covers the full amount of the loan default for the lender |
| Coverage Types | Life coverage (some policies include critical illness/disability) | Risk mitigation for high-ratio mortgages |
| Cost | Based on age, health, and mortgage amount | Based on the mortgage amount and the size of the down payment |
| When It Pays Out | Upon the borrower’s death | When the borrower fails to repay the mortgage |
| Policy Ownership | The lender or an insured individual | The lender |
FAQs about life insurance on a mortgage
Is mortgage life insurance worth it?
It depends on your situation. Mortgage life insurance can provide peace of mind if you want a simple way to ensure your home is paid off when you die. However, it is often more expensive and less flexible than other options.
What is the difference between life insurance and mortgage insurance?
Life insurance provides a lump-sum payout to your chosen beneficiary when you die, and the money can be used for any purpose. Mortgage insurance only covers your remaining mortgage balance and pays the lender, not your family.
Is life insurance better than mortgage insurance?
In most cases, life insurance offers better value and more flexibility. Consider your health, budget, and financial goals when choosing.
Do I need mortgage insurance if I have life insurance?
Not necessarily. If your life insurance coverage is acceptable to pay off your mortgage and support your dependents, you may not need separate mortgage insurance.
Does life insurance cover mortgage protection?
Yes, life insurance can be used for mortgage protection.
Do you need life insurance to get a mortgage?
No, life insurance is not required to get a mortgage in Canada. Lenders may offer or recommend mortgage life insurance, but it is optional, and they cannot mandate it. You have the right to decline and shop for other insurance products if you choose.
The bottom line
Choosing a suitable mortgage life insurance requires careful evaluation. From cost to coverage, BestMO has provided a detailed look at this financial protection. Hope you now possess the tools to navigate what previously seemed like an overwhelming decision with confidence and clarity.
