If you’ve taken out a mortgage to purchase your home, your lender likely asked whether you wanted to purchase their mortgage insurance. It makes sense to want to protect one of the biggest investments you are likely to make, particularly if you plan to live and raise a family in it.
Ensuring your loved ones can keep your family home if something unforeseen happens to you should be a top priority. However, the type of mortgage insurance your lender offered you, commonly called “creditor insurance”, may not be the best option for your situation. Life insurance offers options and benefits that may better fit your financial priorities.
Mortgage Protection: Mortgage Insurance vs. Life Insurance
Let’s take a step back and examine what these products do and how they compare. Mortgage insurance and life insurance have a similar purpose – ensuring your family can continue to live in their home if something happens to you - but there is one main difference.
The death benefit on mortgage insurance only covers your outstanding mortgage amount and is paid directly to the lender. Life insurance pays the death benefit to the beneficiaries named in your policy. Your beneficiaries can apply the money towards the mortgage or anything else. There could be many reasons why your loved ones might prefer to use the death benefit for something other than paying off the mortgage. Your beneficiary may prefer to instead use the funds to cover other expenses such as funeral costs, childcare or other living expenses, to pursue academic or business opportunities, or to invest. Only personal life insurance gives them the flexibility to choose for themselves.
Knowing you’ve got it covered – it’s is better than hoping you do
Another way in which these types of insurance differ is in how they determine if you qualify for the coverage and ultimately if they will pay the claim. Mortgage insurance usually determines if you qualify for the coverage after your beneficiaries submit a claim. Even though you answered their questions when you applied for the insurance, if a pre-existing health condition is found, the claim may be denied. This is called “post-claim”, or “post-death” underwriting and its potential consequences are not the kind of legacy you want to leave behind.
According to Julie Berthiaume, a senior insurance advisor at CDSPI Advisory Services, “with life insurance, all the underwriting is completed before your insurance goes into effect. You may be asked to complete a health questionnaire or take medical tests, but you can be confident that your beneficiaries won’t be left in the cold when they need to make a claim”.
How life insurance and mortgage insurance compare:
| LIFE INSURANCE | MORTGAGE INSURANCE | |
|---|---|---|
| Who owns the policy? | You do. | Your lender. |
| Who benefits? | Your chosen beneficiaries. | Your lender. |
| How can the benefits be used? | Your beneficiaries decide how to use the funds. | To pay off the mortgage only. |
| Does the benefit amount decrease? |
No, it remains constant. You can also (depending on your policy terms and conditions):
|
Yes, it declines with the mortgage balance, so even if there is only a single payment left, that becomes the benefit. In addition, the monthly premium stays the same even as the benefit decreases. |
| When am I underwritten? | Before you are approved. | After a claim is filed. Your coverage can be cancelled, for example, if a pre-existing health condition is found after your application was “approved”. |
| Is it portable? | Yes. This is your policy. It doesn't matter who the lender is. | No. If you change lenders, you will have to find new coverage and you may no longer qualify. |
| How long does coverage last? | You decide what works best for your situation. | At the end of your mortgage term or when you change lenders. If you still need insurance, you will have to find new coverage (see above). |
While mortgage life insurance can be convenient – since premiums can be built into your monthly mortgage payments, and you only need to answer a few questions to be “approved” – it has significant limitations that could leave your loved ones no better off. In fact, many industry experts have expressed skepticism about the efficacy of this type of insurance1, with Rob Carrick of the Globe and Mail warning consumers to avoid it under most circumstances2.
Choosing your life insurance protection:
Life insurance offers the guarantees needed for today while remaining flexible to adapt as needs change. Life insurance policies can provide you options that include allowing you to change your coverage as your financial needs evolve, and some policies may allow you to suspend payments if you become disabled and cannot work. With so many options available, there is a life insurance solution available to suit your financial needs and priorities.
A licensed insurance advisor can answer your questions and help you decide if life insurance is the right option for you to protect your mortgage and your family. They can also help you explore alternatives like disability insurance and critical illness insurance to create a more comprehensive and robust protection plan.
1 https://www.moneysense.ca/spend/insurance/life-insurance/life-insurance-vs-mortgage-insurance/
The information contained in this article is of a general nature only and should not be considered personal insurance or financial advice. For specific advice about your situation, please consult with your financial advisor.