Do you currently have a mortgage? If so, have you ever considered what would happen if you passed away before your house was paid off? Who would be burdened with continuing the mortgage payments?
Rather than leave your loved ones to deal with your mortgage, an insurance policy can provide your family with the funds needed to fully repay your mortgage in the event of your untimely passing. And while a traditional life insurance policy can do that, there are other unique types of insurance that can take care of your mortgage, such as mortgage life insurance.
Let’s take a closer look at mortgage life insurance in Canada to help you determine if this is the right policy for you.
Key Points
- Mortgage life insurance pays your lender the remaining balance of your mortgage in the event that you pass away before the loan is fully repaid.
- Your mortgage lender is the beneficiary of your mortgage life insurance policy.
- This type of insurance coverage may be worth considering if you don’t have a traditional life insurance policy in place.
What Is Mortgage Life Insurance?
Also known as mortgage protection insurance, mortgage life insurance is a type of term life insurance that covers your mortgage completely if you pass away early in life. If this happens, the policy will repay the entire outstanding balance of your mortgage.
In this case, your lender is the beneficiary of the policy rather than your family members. Instead of a death benefit being passed on to your named beneficiaries, the proceeds of the policy go to the lender when you pass away. This is the main difference between mortgage life insurance and a typical life insurance policy.
That said, while your spouse/partner or children may not see any payout, they will not be left with any outstanding mortgage to continue paying.
How Does Mortgage Life Insurance Work?
Mortgage life insurance is finite and expires after a certain period of time, though much longer than a term life insurance policy. Most policies cover terms lengths that are in line with traditional mortgage amortization periods, such as 15 to 30 years. Your policy’s value is tied to whatever is still outstanding on your home loan.
For instance, if you still owe $200,000 on your mortgage, then that’s how much your mortgage life insurance policy will be worth. As such, the coverage amount will decrease as you pay down your mortgage balance. The premiums, however, remain the same throughout the term of the policy.
If you pass away before the term expires, your lender will receive the death benefit, which will be used to cover the remainder of the outstanding mortgage balance. Keep in mind, however, that the death benefit may likely not be paid in the case of suicide, which may not qualify for a payout.
How Much Does Mortgage Life Insurance Cost?
The cost of a mortgage life insurance policy will vary greatly from situation to situation. More specifically, your policy will be based on the following factors:
- Age. The younger you are when you take out your policy, the less you will likely pay for it.
- Health. Your health may be factored into the amount that your insurance provider charges you for your premiums. Generally speaking, those with health issues pay more for their life insurance policies than those who are healthy.
- Coverage type. Mortgage life insurance includes a death benefit that is paid out to the lender. However, some policies may also include a short-term disability component, which will make the policy more expensive.
- Outstanding mortgage balance. Your coverage will depend on the amount still outstanding on your home loan when the policy is first taken out.
- Single versus joint coverage. If your policy covers both you and your spouse, you will pay more for it.
Is Mortgage Life Insurance The Same As Mortgage Loan Insurance?
No. While mortgage life insurance pays off your entire mortgage in the event that you pass away, mortgage loan insurance (also known as mortgage default insurance) does not. Instead, mortgage loan insurance protects the lender if you default on the loan.
So, while the lender is the beneficiary of both types of insurance, the purpose of each type of policy is different.
Mortgage Life Insurance Vs. Traditional Life Insurance
Mortgage life insurance and traditional life insurance differ in the following ways:
| Mortgage Life Insurance | Traditional Life Insurance | |
| Coverage | Covers the outstanding balance of your home loan, which decreases as the balance is paid off. | Remains the same throughout the term of the policy and is not tied to your mortgage. |
| Policy Term | Coverage expires when your mortgage is fully repaid. | -Term life: Expires after a set period of time. -Whole life: No expiry (lasts until you pass away). |
| Beneficiary | Your lender | Your named beneficiaries |
Mortgage Life Insurance Vs. Home Insurance
A conventional home insurance policy provides financial coverage in the event that your home is damaged, or the contents within it are damaged, lost, or stolen, assuming the issue is covered under your policy. In this case, you will be compensated for any damages or losses according to your home insurance policy. This type of insurance does not pay out a benefit in the event of your passing.
Mortgage Life Insurance Providers
You can get mortgage life insurance from your mortgage lender or from one of several insurance providers in Canada. Here are a few examples:
| Insurance Provider | Coverage Amount | Age | Cancellation Period |
| Manulife | Up to $1 million per person | 18 – 64 | 60 days |
| Canada Life | Up to $500,000 | 18 – 64 | 30 days |
| TD Bank | Up to $1 million | 18 – 69 | 30 days |
| Scotiabank | Up to $1 million | N/A | 30 days |
What To Look For In A Mortgage Life Insurance Policy
If you’re considering taking out a mortgage life insurance policy, consider the following factors before making your choice:
- Premiums. The cost of the policy should fit comfortably within your budget.
- Flexibility. You can adjust the coverage level to make the premiums more affordable.
- Waiting period. Some policies might not take effect right away.
- Claim policy. Look into the claims process, as it can vary between insurers.
- Discounts. Some insurance providers might offer discounts for joint policies or if you take out other types of policies with the same insurer.
- Benefit payment. Find out how the death benefit will be paid out when a claim is filed. While some insurance providers will pay out the flat amount you insured, others will just pay out what’s left on the mortgage.
What About Critical Illness And Disability?
You may also choose to enhance your policy by adding mortgage critical illness or disability coverage to your policy. This coverage will pay your mortgage lender the outstanding balance of your home loan in the event that you suffer a covered illness or disability.
Pros And Cons Of Mortgage Life Insurance
There are perks and drawbacks to mortgage life insurance to consider before purchasing a policy:
Pros
There are a few good reasons to buy mortgage life insurance:
- Your mortgage balance is covered. Your family won’t have to worry about taking over the mortgage payments if you pass away before the loan is paid off.
- Alternative to life insurance. If you can’t qualify for a traditional life insurance policy, the mortgage life insurance plan can still provide you with some financial coverage.
- Premiums are added to your mortgage. You can roll your mortgage life insurance premiums into your regular mortgage payments and take care of both fees in a single payment.
Cons
Consider the following downsides to buying mortgage life insurance:
- Payouts decrease over time. As you pay off your mortgage, you’ll owe less and less. But your premiums on your mortgage life insurance policy will remain the same. So, you’d be paying the same premium amounts for continuously reduced coverage.
- Payouts are reserved only for your mortgage. If you pass away before your mortgage is paid off, your lender will be the one collecting the payout to cover the rest of your mortgage balance. Your loved ones wouldn’t see any payouts and therefore wouldn’t be able to use any insurance funds for other purposes.
- Non-transferrable. If you change mortgage lenders or move to a new home, you can’t take your mortgage life insurance policy with you. In these cases, your policy would end.
Do You Need Mortgage Life Insurance?
If you already have a life insurance policy in place, then a mortgage life insurance policy is probably not needed. That said, you should still check your life insurance policy’s coverage level to make sure t’s enough.
However, if you do not currently have life insurance, then a mortgage life insurance policy may be something worth considering. Depending on the amount of coverage you opt for, a life insurance policy can provide you with mortgage protection along with additional financial protection for your beneficiaries.
If you’re unable to qualify for a traditional life insurance policy or simply haven’t taken the time to take one out, then a mortgage protection policy might be the way to go. It will give you the peace of mind of knowing that your loved ones will not be left with major mortgage payments if you pass away before your time.
Final Thoughts
Mortgage life insurance is not mandatory, but it could provide you with some peace of mind knowing that your loved ones won’t be stuck taking over your mortgage payments in the event of your untimely passing. That said, if you already have a traditional life insurance policy, then perhaps a mortgage life insurance plan may not be worth the additional premiums. Consider the coverage you have with your life insurance plan before deciding whether to buy mortgage life insurance.
