You probably heard the pitch when you applied for your mortgage: add mortgage life insurance for just a few extra dollars on your monthly payment. Lenders want you to sign up for this service, but is it mandatory to have mortgage life insurance in Canada? Let’s explore this further.
Is mortgage life insurance mandatory in Canada?
Simply the answer is no, mortgage life insurance is not mandatory in Canada. It exists to protect the bank's loan to you (i.e. your mortgage), so if you die, your mortgage is paid. There are better options available to protect your family from financial ruin if you can't make your mortgage payments. Any major life event, such as buying a new home, is an excellent time to explore life insurance.
What is mortgage life insurance?
Now that you know it’s not mandatory, you might still want know more about mortgage life insurance before you decide to decline the coverage.
Mortgage life insurance is an optional product sold by mortgage lenders that pays off your mortgage balance in the event of your death. Should the unthinkable happen, this insurance coverage will ensure that your estate doesn't owe any money on your home. Mortgage payments will stop, and your heirs won't have to worry about making payments on a mortgage they can't afford without your income.
Should I get mortgage life insurance?
Mortgage life insurance sounds appealing. Knowing that your dependents or heirs won’t have to worry about mortgage payments in the event of your death is comforting. But there are some downsides to mortgage life insurance that you should think about carefully before signing up.
Mortgage life insurance only covers your mortgage
While other life insurance policies pay cash to your beneficiary, covering much more than just your outstanding mortgage payments, mortgage life insurance only reduces your mortgage balance to $0. Though your family will be in a better position without a mortgage payment, there are still many other expenses following an unexpected death. In addition to funeral costs, other bills won't stop. Traditional life insurance gives your family options for how they want to use the money, providing them with more of a financial safety net in your absence.
Mortgages are relatively inexpensive
While your mortgage is likely your most significant after-tax expense, mortgages have a low cost of borrowing when compared with other loans. Your family may actually be better off with a life insurance payment that allows them to pay off more expensive debt rather than eliminating your mortgage.
Mortgages are elastic
Because your mortgage is secured against your home, you (and your family) have a fair amount of flexibility to make changes. Depending on how much time you have left on your mortgage, your family could refinance the mortgage and reduce the monthly payment significantly to an amount they can afford. They could also sell the home and downsize, potentially making a profit on the sale even after paying off the mortgage.
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Mortgage life insurance coverage depreciates over time
When you get mortgage life insurance, your payments stay the same for the term of your mortgage. But as you pay the mortgage off, the amount your policy pays out is reduced. If you make additional payments toward your mortgage, you lose that amount of coverage. Other life insurance products offer coverage guaranteed to stay the same or even go up over time. They are much better investments.
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What should I consider instead of mortgage life insurance?
Most Canadians with a mortgage can get better coverage and value with term life insurance. This life insurance product guarantees you the same rate and coverage for a fixed term, with 10 or 20 year terms being some of the more popular. You can name anyone as the beneficiary of your policy. They're guaranteed to receive the total amount of your coverage in the event of your death. They can use the money however it makes sense for them. Whether it's to pay off the mortgage, help with the monthly payments, make funeral arrangements, or cover their cost of living. For most Canadians with a mortgage, a term life insurance policy makes sense. That's because your life insurance needs will be significantly reduced by the time your term expires.
You could also choose permanent life insurance, which never expires. Instead, your premiums are invested and grow in value over time. That means your beneficiary receives a combination of insurance coverage and the value of your investments. As long as you continue making your payments, permanent life insurance is guaranteed to any age. This is the more expensive option, but it does include the most functionality and length of coverage.
What if I was forced to buy mortgage insurance?
If you were told that mortgage insurance coverage was mandatory, you might have confused mortgage life insurance with CMHC (Canada Mortgage and Housing Corporation) mortgage insurance, which is required in some cases depending on your mortgage situation.
Whereas mortgage life insurance pays off the balance of your mortgage in the event of your death, CMHC mortgage insurance pays the lender if you default. This coverage is required when you have a down payment of less than 20%. Occasionally the mortgage lender will make CMHC mortgage insurance a condition of giving you a mortgage when you or the property fall short of its criteria. When you buy CMHC mortgage insurance, the cost is added to your mortgage and becomes part of your monthly payment.
The bottom line
No, mortgage life insurance isn’t mandatory in Canada. But getting life insurance is a good idea – especially if you have a family that would struggle to pay the bills without your income.
So, instead of mortgage life insurance, it often makes more sense to get a term life insurance policy. That way, your beneficiary can use the money however they like (or how you stipulate it in your will). Not only does term life insurance give them more flexibility, it usually offers better value for the money than mortgage life insurance does.
In some cases, you might still need to buy a different type of mortgage insurance coverage that protects the bank if you default. CMHC insurance, which is required when you have a down payment of less than 20% or when you or the property fall short of the bank's lending criteria.
If you're thinking about investing in life insurance to protect your loved ones, compare life insurance quotes online to find out how much you could save.