No, mortgage life insurance isn’t mandatory in Canada but if you’re a first-time home buyer or a homeowner with a mortgage obligation, life insurance for mortgage protection is something you might want to seriously consider for your loved ones’ financial protection.
In this blog post, we’ll tell you everything you need to know about mortgage life insurance, and why individual life insurance is a better option for your family.
What Is Mortgage Life Insurance?
First, let’s start with the basics.
Mortgage protection insurance is a type of life insurance policy that is designed to pay off the remaining mortgage balance in the event that the life insured dies during the term of the loan.
One of the key benefits of mortgage protection insurance is that it can help ensure that your loved ones are not left with a large debt burden following your death.
Your mortgage life insurance is a policy that your bank or lending institution takes out on you when you get a mortgage. It’s there to protect the bank in case something happens to you and you can’t make your mortgage payments.
There are a few important facts to know before you buy this type of insurance policy. Listed below are some of them.
Mortgage life insurance does not pay out a death benefit to your family. Instead, the money goes to the lender of your mortgage, to release your loved ones from your mortgage obligations. So, no matter how small your mortgage obligation is at the time of death, no benefit will be paid out to your loved ones, in excess of what’s owed to the bank.
Unlike a standard life insurance policy, a mortgage life insurance policy is tied to your mortgage, which means that it gets canceled, and a new one is issued if you refinance or move to a different lender.
Another important factor to consider when choosing a mortgage life insurance policy is its term length. A bank offered mortgage life insurance has a 5-year term which is tied to your 5-year loan term with them, while you can get a 25-year term life insurance, for a lower premium that stays level during the 25-year mortgage payment period.
As you may understand by now, there’s a huge difference in benefits with individual life insurance than a bank-offered mortgage life insurance, keep in mind that the latter is designed to protect your lender first, not your loved ones.
Post-Claim Underwriting
One thing to be aware of is that bank (or lender) offered mortgage protection insurance policies that include a post-claim underwriting clause. This means that the insurance company only goes through the underwriting process after a claim is made.
This means that full underwriting wasn’t done at the time of your life insurance application, as a result, there’s no guarantee that the insurance will actually payout the benefits.
So, what does this mean for you? Well, if you are considering purchasing mortgage protection insurance, it is important to be aware of whether or not the policy includes post-claim underwriting. If it does, then you need to ask yourself whether you are comfortable with the risk that your policy may not pay out in the event of a claim.
If you are not comfortable with this risk, then you may want to consider purchasing an individual term life insurance for your family’s mortgage protection, this way, you can be sure that your policy will pay out in the event of a claim.
Decreasing Death Benefit
Another thing that you should be aware of, and something that I slightly mentioned in the above section is the fact that a bank mortgage life insurance only pays out whatever the mortgage balance is at the time of the debtor’s death, while you continue paying the same or higher monthly premiums over the 25-year mortgage period.
In most cases, Canadians aren’t aware of the exact amount of monthly premiums that they are paying, this is because the mortgage premiums are usually collected on a bi-weekly basis, together with their mortgage payments, but when you compare the benefits with an individual term life insurance, you realize that you’re paying more for a non-guaranteed coverage.
5-Year Term
If you’re not aware yet, your mortgage obligation with your current lender will only be 5 years, yes, even though the full length of your mortgage is 25 years, your loan term with your current lender isn’t; you can then renew this or move your mortgage somewhere else after the term.
As a result, you either renew your mortgage life insurance with your existing lender or you will need to requalify for insurance if you change lenders. If your health condition or lifestyle changes, you may not qualify with a new lender. And of course, as you get older, your premiums will go up.
A term life insurance used for mortgage purposes can be designed for the whole 25-year period (25-year term life insurance), the contribution of which is based on your current age and will stay the same for the next 25 years. This can also be designed with a level death benefit so the death benefit never decreases while you’re mortgage decreases over time. In case something happens to you when the mortgage debt is already low, any extra money from the death benefit pays out benefits to your loved ones, not the insurance company, nor the bank!
As an added benefit, most individual term life insurance policies are convertible into permanent life insurance. Permanent life insurance such as whole life or universal life insurance policies aims to give you a lifetime of death benefit coverage so you don’t risk losing death benefits at old age, which most Canadians do.
Bank Mortgage Life Insurance May End Up Costing Your More
A bank mortgage life insurance is usually more expensive than an individual term life insurance, which can be used for the same purpose.
For one, the death benefit (if it pays) is paid directly to your lender, and not to your beneficiaries. Also, it will only pay out your mortgage balance at the time of death, while you on the other hand pay a level premium, which is usually more expensive than a 25-year individual term life insurance.
The post-claim underwriting clause makes the claim process difficult because they will only run the underwriting process at the time of claim, and not at the time of the insurance application. When applying for life insurance, you should be approved or declined at the time of application, so you and your loved ones need not worry about whether or not they will receive the benefits at the time of claim.
Finally, mortgage life insurance only pays off your mortgage. It doesn’t cover any other debts you might have, like credit cards or car loans. If you want to make sure your loved ones are taken care of financially if you die, you’ll need to purchase a well-planned life insurance policy.
Do I need Life Insurance for a Mortgage in Canada?
Yes, you do need life insurance to protect your loved ones from your mortgage obligations.
While mortgage life insurance is not required by law in Canada, many lenders will require borrowers to have a life insurance policy to protect the loan, and while this requirement isn’t legally enforceable, you will need to sign a waiver stating that you do have individual life insurance if you’re declining the coverage from your mortgage lender and that if you don’t have, you’re taking on the risk personally (or at least your loved ones).
When a mortgagee passes away during the term of the mortgage and the mortgage wasn’t insured, the remaining debtor will need to qualify for the loan by herself or himself. If their income falls short and is declined, they may risk losing their home.
The average mortgage length in Canada is 25 years, and for many Canadians, buying a home is their biggest investment (and debt). As a result, it’s important to make sure that your investment is protected in case something happens to you, so your loved ones never have to lose their home.
If you’ve reached this part of the article, you may now know that you’re actually better off with an individual term life insurance if you’re just looking to protect your loved ones from your mortgage obligation, in case you die while still paying off your mortgage. We can help you design a life insurance policy for this purpose or even design you a plan that fully covers all your financial obligations. Just let us know here, and we’ll accommodate a schedule that works best for you.
Can I Remove My Mortgage Life Insurance in Canada?
The short answer to this question is yes, you can remove your mortgage life insurance in Canada but if you don’t have life insurance, your family will be absorbing the financial risk.
If you live in Canada, you probably have a mortgage attached to your home. Your estate (or loved ones) will be responsible for repaying the mortgage balance and any monthly payments when you die.
Here’s what you need to know if you’re thinking of canceling your mortgage life insurance.
When we buy a home, many of us assume the bank will require some type of life insurance on the property — and many banks do.
The idea is that if something happens to you, your spouse and/or any other dependents will be protected financially against your mortgage obligation.
The cost of this protection is built into your mortgage payments as part of your monthly or bi-weekly amortization. Some people don’t want or think that they don’t need mortgage life insurance and decide to opt-out of this feature in their mortgage agreement.
The good news is that, yes, you can remove your mortgage life insurance but do make sure that you have ample life insurance to protect your loved ones from such a huge financial obligation. Existing life insurance (if you have it already) can be used for your loved ones’ financial protection, just make sure that it’s ample enough to cover the whole loan.
If you don’t have one yet, we can help you structure one that fits your budget.
Is Mortgage Life Insurance Worth It?
Since there’s no guarantee that a bank mortgage insurance will payout in the event of the life insured’s death due to the post-claim underwriting clause, the mortgage insurance offered by your lender simply isn’t worth it!
Life insurance for mortgage protection is one of those financial products that you hope you never have to use, but it not only provides peace of mind in case the worst happens but it aims to provide your loved ones with the necessary financial relief, in case a breadwinner passes.
A mortgage life insurance is usually required or at least “suggested” by lenders if you’re borrowing money to buy a home, but it’s not required by law. The death benefit from a mortgage life insurance policy goes directly to your lender, not your beneficiaries.
So, if you’re thinking about purchasing a mortgage life insurance policy, know that you have a few options.
You can just sign on the dotted line and get your mortgage life insurance with your lender, or you can sign the waiver and get fully-underwritten individual life insurance for your family’s protection.
Understand that a bank-offered mortgage life insurance policy is designed to protect your lender, not your loved ones. Individual life insurance aims to protect your family first, not the bank. This means that the named beneficiaries are your loved ones, and while some banks require a statement of collateral assignment for the amount of outstanding mortgage, their benefit only goes up to the extent of the loan, the rest of the money is paid out to your loved ones.
The Best Mortgage Life Insurance in Canada
A good mortgage life insurance policy provides your family with a safety net in the event of your death or disability. Although it is not a legal requirement, you should still consider purchasing mortgage protection insurance. It will cover your family’s mortgage payments in the event of your death or disability.
So how do you choose the best mortgage life insurance in Canada?
The best mortgage life insurance in Canada is one that covers your family’s financial interest first, one that is sure to pay out when the need to make a claim arises, and one that doesn’t get expensive over time.
While mortgage life insurance is available through most major banks and life insurance companies, there are a few key differences between mortgage life insurance policies and term life insurance.
The major differences include the amount of coverage, monthly premiums, and the added types of coverage.
For most people, term life insurance offers a better value. Moreover, it’s more affordable than bank offered mortgage life insurance.
Once approved, you need not worry as to whether or not it will actually payout if there’s ever a need to claim because full underwriting is done at the time of application, and not at the time of claim.
Finally, the insurance money goes directly to your family as they are the primary named beneficiaries and not your lender.
Conclusion
Mortgage life insurance is a type of life insurance that pays off your mortgage if you die. It’s usually required if you’re borrowing money to buy a home, but it’s not required by law. The death benefit from a bank mortgage life insurance policy goes directly to your lender, not your beneficiaries. Instead of getting your mortgage life insurance with your bank or mortgage lender, know that you have far better benefits with an individual term life insurance that you can use for mortgage protection purposes.
If you’re just looking to implement life insurance protection, term life insurance is usually more affordable than the one with the banks, you can add other coverages as riders as well like credit disability, and critical illness insurance for more comprehensive protection.
