Mortgage Life Insurance

Mortgage Insurance vs. Life Insurance: What’s the difference?

If you’re like most Canadians that are new homeowners, you are probably getting a mortgage at a bank. Most banks will show you how easy it is to get mortgage life insurance to pay off your mortgage in the event of your untimely death. So you easily sign the documents along with your mortgage and everything is covered, right? Mortgage life insurance is definitely the easiest way to buy insurance to cover your mortgage in case you die, but there are a few catches to be aware of.

Did you know:

  • Bank mortgage life insurance is a type of “No Medical insurance” that has little support to ensure the medical questions are answered correctly. The underwriting only happens if and when you die, if you have any medical conditions and you answered any of the questions incorrectly, your claim could be denied!
  • The coverage amount under mortgage life insurance is only for your outstanding mortgage, as you pay down your mortgage the coverage amount continually decreases but your premiums stay the same
  • The death benefit under mortgage life insurance is paid directly to the bank and your family has no flexibility on how to use these funds
  • If you change mortgage providers, you will need to re-apply for the coverage and will likely be paying a higher premium
  • Mortgage insurance usually costs more than traditionally issued life insurance!

What is Mortgage Life Insurance?

Mortgage Life Insurance is coverage that you can purchase through the lender to pay off or pay down the mortgage if you die. The coverage is always applied to the mortgage balance and the premium is added to your monthly mortgage payments.

This is not to be confused with Mortgage Default Insurance, which is offered by the Canada Mortage and Housing Corporation (CMHC) which is mandatory insurance when your down-payment of your home is between 5% and 19.99% of the total home purchase. All other mortgage life insurance products offered by the bank are optional.

How is Traditional Life Insurance different?

Traditional Life Insurance is coverage that is purchased through an insurance company. It is unlinked to your mortgage and has many benefits over mortgage insurance such as:

  • You are the owner as the policyholder
  • You can designate a beneficiary of your choice and change it if you want
  • Traditional Life Insurance is pre-underwritten which means there will be no surprises if a claim should be made
  • The benefit amount stays the same throughout the term of the policy
  • The terms are more flexible and you choose whatever length best suits your personal needs
  • Most policies will offer convertibility options to a permanent policy meaning in the future you can convert your term policy to a permanent policy regardless of any adverse health conditions that have arisen

Is Mortgage Life Insurance worth it?

Mortgage Life Insurance works very well for the banks, but it won’t replace traditional term life insurance. Mortgage insurance lacks the flexibility, affordability, and coverage that traditional life insurance has.

Traditional term life insurance will ensure that your coverage does not decrease over time, and you can make decisions as to who will manage your benefit in the event of your death. Traditional life insurance can be used to cover your remaining mortgage, as well as other debts and expenses, pay for your children’s education, or used for charitable gifting.

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