Mortgage life insurance: what you don’t know about this “convenient” coverage could cost you thousands.
You’ve just purchased a home or are in the process of finalizing your mortgage. Amidst signing paperwork and coordinating your move, your bank casually asks, “Would you like to add mortgage life insurance to your loan? It’s just a few extra dollars a month.”
You’re exhausted. You’ve been juggling lawyers, real estate agents, inspections, finances, and probably a few IKEA tabs on your browser. The idea of bundling some additional protection into your monthly payment sounds easy and offers you peace of mind.
However, here’s the problem: what seems convenient today could turn into a costly mistake tomorrow.
In May 2023, the International Monetary Fund released a report on the countries that are most at risk of mortgage defaults. At greatest risk? Canada, along with Australia, Norway and Sweden.
There are many reasons for this vulnerability, but the problem began when housing prices in Canada skyrocketed to record levels during the pandemic. Then the Bank of Canada started raising interest rates to contain inflation, nine times so far since April 2022. As interest rates increased, so did mortgage rates, exposing Canadian households already carrying high levels of debt to even higher monthly payments.
What Is Mortgage Life Insurance?
Mortgage life insurance, also known as creditor insurance, is a type of policy offered by banks or mortgage lenders. It promises to pay off your mortgage balance if you pass away before the loan is fully repaid.
At first glance, this appears to be a solid way to protect your family. However, there are some important details you may not be aware of. Initially, the payout amount decreases over time. As your mortgage balance lowers, so does the benefit, but your monthly premiums remain the same.
Additionally, there’s a significant drawback: the money doesn’t go to your loved ones. Instead, it goes directly to your lender. Your family has no control over how it’s used. The benefit they were counting on is absorbed by the bank as soon as it’s triggered.
What Makes Term Life Insurance Different and Why Most People Say “Yes” Too Quickly
Individual term life insurance, which can be purchased through a licensed broker, operates quite differently. With this type of insurance, you select the amount of coverage and the duration—options typically include 10, 15, or 20 years of coverage. Notably, the benefit amount remains unchanged over time, and your premiums are generally lower than those charged by banks for mortgage life insurance.
One of the key advantages of individual term life insurance is that the funds go directly to your beneficiaries. This means your family can use the money to pay off the mortgage or choose how to spend it as they see fit, giving them control rather than leaving it to the lender.
On the other hand, mortgage life insurance is often presented at a time when you may feel overwhelmed. You might be managing moving dates, coordinating with banks and lawyers, and possibly dealing with kids and pets, all while surrounded by boxes. When someone suggests, “We can just add this to your mortgage payment,” it can seem like a convenient solution that simplifies the decision-making process.
Additionally, the cost is often presented in small increments, such as a few cents per $1,000, which can make it sound manageable. However, once you crunch the numbers and compare it to other forms of life insurance, the reality can be stark. You may find that you are paying significantly more for coverage that provides far fewer benefits.
A Real-Life Comparison
Let’s look at a typical example. Imagine you and your spouse are 46 and 44 years old, respectively, and both of you are non-smokers. If you take out a $350,000 mortgage, the cost of RBC’s HomeProtector mortgage insurance plan would be approximately $257.04 per month for both of you.
Now, let’s compare that to individual term life insurance rates using TermCanada’s online quote calculator. A 10-year term policy for both of you through Empire Life would cost only $62.78 per month. A 15-year plan with Assumption Life is around $90.14, and even a 20-year policy with Manulife is just $120.53 per month.
So, why is bank mortgage insurance double or even triple the price? This is a question worth considering before you sign up.
Underwriting: Before or After Death?
One of the most concerning aspects of mortgage life insurance is the manner in which underwriting is conducted. Most bank plans use a process known as “post-claim underwriting.” This means that you only answer a few quick medical questions at the beginning, but the thorough examination of your medical history occurs later, when your family files a claim.
If the insurer discovers any undisclosed or misunderstood medical information during this later review, they may deny the payout. As a result, your family could be left with a mortgage to pay and no insurance benefit, despite having paid premiums for years.
In contrast, individual life insurance undergoes a complete underwriting process at the time of application. Once you are approved, your coverage is guaranteed, and you can rest assured that there will be no unpleasant surprises later on. Your family can trust that the benefit will be paid as promised.
Can You Take It With You?
Portability is an important aspect that many people overlook. Mortgage life insurance is linked to your specific lender, meaning that if you switch banks when your mortgage renews, your coverage ends. You will need to reapply for insurance, and depending on your health status at that time, you may be denied coverage or face significantly higher rates.
On the other hand, individual life insurance is portable. You own the policy, which means you can move, refinance, or change lenders without losing your coverage. It is not tied to your mortgage or home; it is tied to you.
Shrinking Coverage, Static Premiums
One drawback of mortgage life insurance is that your coverage decreases over time, just as your mortgage balance does. However, your premiums remain the same. You continue to pay a fixed amount each month, even though the potential payout becomes smaller and smaller.
With term life insurance, your benefit amount stays the same from day one to the final day of the policy. That means your family knows exactly what they’re getting, no matter when the claim is made.
Who Benefits from the Coverage?
Mortgage life insurance and term life insurance serve different purposes when it comes to protecting your family’s financial future.
With mortgage life insurance, the bank is the beneficiary. If something happens to you, the payout is sent directly to the lender to cover the mortgage, with no questions asked.
In contrast, with term life insurance, you can choose your own beneficiaries. The money goes to your spouse, children, or anyone else you designate. They can use the funds to pay off the mortgage, cover education costs, manage daily expenses, or invest for the future. This flexibility can be incredibly important during a challenging time.
Note for Married Couples:
Consider a scenario that many people overlook: what if both spouses die in the same accident? If you each have individual term life insurance policies, your beneficiaries will receive two separate payouts—one for each of you. However, with a joint mortgage life insurance policy through the bank, there is only one payout. This benefit solely covers the mortgage, leaving your family responsible for the remaining financial burdens.
What Happens When the Mortgage Ends?
Most bank mortgage insurance policies end when the mortgage is paid off or when you reach a certain age, typically around 70. While this may seem acceptable, what if you want continued coverage? Additionally, what if your health has changed and you are unable to qualify for a new policy?
Many term life insurance policies are renewable or convertible. This means you can extend them or convert them into permanent policies, such as Whole Life or Term-to-100, without needing to undergo another medical exam. This can be a significant advantage if you have developed health issues but still want long-term protection.
Is Mortgage Life Insurance Ever a Good Idea?
In some cases, yes. If you’re uninsurable due to serious health conditions and can’t qualify for individual coverage, bank mortgage insurance may be your only option. It’s not ideal, but it’s better than having no protection at all.
However, if you’re in reasonably good health, you’ll almost always get better coverage and lower premiums with term life insurance. You’ll have more control, more flexibility, and a clearer understanding of what you’re paying for.
You Can Mix and Match
Some individuals opt to layer their insurance coverage. For example, you might consider obtaining a 20-year term policy to cover your mortgage, paired with a small permanent policy to address funeral expenses or estate planning needs. Additionally, you can include critical illness insurance to safeguard against the loss of income in the event of a serious health issue. Ultimately, the key is to customize your protection to meet your specific requirements, rather than simply focusing on your mortgage balance.
How to Shop for Better Coverage
The simplest way to compare your options is by using a reliable quote platform like TermCanada.com. Simply enter your basic information, including age, coverage amount, and health status, and you’ll receive instant quotes from over 25 Canadian life insurance providers. A licensed broker can then assist you in reviewing the options and finding a policy that suits your needs.
Spending just 10 minutes to compare options can save your family thousands of dollars and give you significantly better long-term protection.
Final Thoughts: Don’t Let Convenience Cost You
When signing many documents to secure a mortgage, it’s easy to agree to mortgage life insurance without much thought. You’re excited about getting the keys to your new home and may not fully consider your options. However, just because it’s a straightforward choice doesn’t mean it’s the best one for you.
Bank mortgage insurance is designed to protect the lender, while individual life insurance focuses on securing your family’s future. Ultimately, the decision is yours, but it’s vital to make it with a clear understanding and accurate information.
While your home is significant, your family’s future is even more important.
