*Originally published on August 19, 2019, and was update on September 20, 2023
For many Canadians, taking out a mortgage is the largest financial commitment they’ll ever make – one that requires a stable income. Should tragedy strike and a mortgage holder passes away, it can put the rest of their household in a severe financial crisis if they cannot continue to make mortgage payments without a main income earner. Taking out some form of insurance can provide peace of mind that your loved ones will be able to keep their home and be financially provided for upon the death of a mortgage holder.
However, just as it’s important to shop around for the best mortgage rate, it’s vital to explore your options when choosing an insurance policy. Let’s look at two common ways to ensure your mortgage will be paid off after death: mortgage insurance and life insurance.
Mortgage insurance vs life insurance:
In short, mortgage insurance is a type of life insurance purchased from your mortgage provider, which only covers your mortgage debt, also referred to as declining insurance. Normal life insurance is broader coverage that can cover both your mortgage and other financial costs, and is sold by a life insurance company.
What is mortgage insurance?
A financial institution sells mortgage life insurance to pay off your mortgage in case of death. A mortgage lender will walk you through the paperwork; it’s simple and easy. There are some medical history questions, but no medical exams, and, if approved, it’s tacked on to your monthly mortgage payments.
The premiums are determined by your demographics – the price is based on the average age of the participants in the plan – and the cost of your mortgage. If you pay the insurance premiums for the duration of your term, your mortgage should be covered should you die.
What is term life insurance?
Term life insurance is sold by a life insurance broker and covers you for a set period like 5, 20, or 30 years; the level of pricing is determined based on the age you are today. The length of the term is important – you want to specify a term that protects you against financial disasters, where your dependents may be significantly affected. An example would be ensuring your kids have enough money before they go to college, and still require financial support.
You can also specify how much the payout should be in case of a claim. There are medical history questions, and often medical testing is required. This is important, as the chance of payout is better when all the medical requirements are done upfront. It’s easy to secure a term life policy, as it is widely available through most life insurance suppliers. So, make sure to shop for life insurance quotes to get the best rate, as they can vary. The monthly premiums are based on your demographics and overall health, the payout, and term length. You can use a life insurance payout for any purpose. Common uses include paying off debts, your mortgage, or replacing your salary to support your beneficiaries if you are deceased.
Get the best life insurance rates in Canada.
Why buy term life insurance over mortgage insurance
When you purchase life insurance, you own the policy. If you buy mortgage life insurance, however, the mortgage lender actually holds the policy. In other words, the mortgage lender is the sole beneficiary with mortgage insurance, but with life insurance, you decide who will be the beneficiary.
Elaborating on the above statement, it’s you who defines a life insurance beneficiary. That means you can also change who the beneficiary is. For example, you could change the beneficiary to your kids from your spouse in the event of a divorce. With mortgage insurance, only the lender can be the beneficiary.
3. Medical testing
The application for mortgage insurance is typically simpler; there’s usually no medical testing, and the applicant will just need to answer a few simple questions. However, this could be to your detriment. Despite answering to the best of your knowledge, you may inadvertently provide incorrect information that could void your coverage. For example, you may have forgotten about that time a walk-in clinic doctor tested you for high blood pressure;failing to mention it could result in your claim being denied.
A key difference with mortgage insurance is the underwriting happens after the claim is made – known as post underwriting – meaning they can look for all kinds of reasons to deny the claim. While there is medical testing with term life insurance, it’s only for your benefit, to protect you in the case of a claim. The life insurance broker has assured your coverage ahead of time thanks to the testing.
READ MORE: How no-medical life insurance coverage works
4. Policy renewal
If you signed up for a 20- or 30-year term life policy, you don’t have to do anything beyond continuing to pay for your monthly premiums. But, you’ll need to renew your mortgage insurance every time you renew your mortgage. The problem is that if you renew every 5 years, you’re also older, meaning you’re more of a risk and so you’ll pay more in premiums. With term life, your premiums remain the same for the length of the term. Insurance is typically cheaper the younger you buy it.
Life insurance is always portable – it stays with you, even if you change mortgage lenders. You also have the flexibility to use it for any purpose; while mortgage protection is a common use, you aren’t limited to that. Mortgage insurance, however. will only protect the payment of your mortgage, with no additional cash outlays for your loved ones. You will also need to re-apply for mortgage insurance in the case you switch lenders, which could result in you paying more based on your now-higher age group.
Because you pay off your mortgage principal over time, the amount of coverage you’d receive from a mortgage insurance product also declines as your mortgage shrinks, despite the fact that your premiums won’t change. With life insurance, the death benefit of the payout remains the same throughout your term.
Mortgage insurance covers your mortgage. You can use life insurance to cover whatever you want, such as funeral expenses, debts, income replacement, or your mortgage.
You choose how to shop for life insurance, whether it be online or through a brokerage, and whatever the method, the final sale will be conducted by a certified life insurance broker. The staff in a financial institution are not required to have a license or pass any exams to sell mortgage insurance.
Mortgage insurance stops when the mortgage is paid, or if you choose to move to a lender that offers a better rate. With term life, you can extend your policy for a few more years or convert it into a whole life insurance policy.
10. Conversion Privilege
Some term insurance companies have built-in conversion privilege. What this means is that you may convert your term to permanent life insurance with no medicals or questions before age 75. this is a huge benefit for unhealthy clients who wish to continue with the insurance beyond the term and can't qualify due to existing medical conditions
The bottom line
Mortgage life insurance is convenient because it’s easy to apply when you’re getting a mortgage. However, getting a life insurance policy instead is more beneficial in terms of cost and coverage. . Keep in mind that mortgage and life insurance aren’t mandatory. But, when it comes to protecting your most substantial financial investment – and your precious dependents from financial burdens – life insurance is the way to go.