Buying a first home is a huge moment. Although it involves months of the stress of calculations, finally at the moment of sale you are able to relax and feel secure. You have bargained with the seller and negotiated a mortgage repayment plan that you will be able to fulfill every month. If you are single then you can afford to sit back and enjoy your newfound sense of security.
If however, you have dependents, there are some further steps that might be worthwhile taking. If you have a partner or young children, the mortgage you have taken out might partially or entirely rest on your shoulders. What would happen if you were no longer able to work, or in the worst scenario, died?
What is the best way to protect your loved ones, to make sure that they are protected, and are able to stay in your home even if the worst should come to pass? This guide compares mortgage life and life insurance to help you pick the best kind of insurance to help you.
What are mortgage life insurance and mortgage default insurance?
Before companies mortgage life and life insurance, it is important to review what mortgage life insurance is. The terms can get confusing.
What is mortgage life insurance?
Mortgage life insurance, also called mortgage protection insurance, ensures that if you die before paying off your mortgage fully that the provider will pay off the remainder. In return for buying the premiums, you have peace of mind that in the event of your death the mortgage will be paid off and that your heirs will fully own your home.
Unlike typical life insurance, you are unable to choose the beneficiary. The beneficiary is always your mortgage lender who will be paid the remaining balance of your mortgage directly by your insurer. One quality of mortgage life insurance is that the payout diminishes over time, rather than increasing in line with the amounts of premiums paid. The more of your mortgage loan you have paid off, the smaller the payout will be.
Some providers now offer “level death benefit” so that the payout remains at the same level, even when your mortgage debt is reduced below the level of the amount of coverage you purchased.
What is mortgage default insurance?
Mortgage insurance protects the lender from you defaulting on your mortgage payments. If your deposit is under 20% the lender will likely make having this a condition of offering you the loan.
The lender wants to protect itself from the possibility that you miss payments or even default entirely. You can avoid having to pay for mortgage insurance by making a larger deposit when buying your home.
Mortgage default insurance, or CMHC insurance, protects the lender and is not optional without a 20% downpayment. See our mortgage default insurance guide to learn more.
How much does mortgage life insurance cost?
The cost of mortgage life insurance is linked to the cost of your mortgage. Depending on your age, premiums can range between 10 cents and $1.65 for every $1000 in coverage.
If you were to purchase a $300 000 condominium with a 15% ($45 000) downpayment, this means a mortgage of $255 000. If you purchase mortgage life insurance you would pay a premium based on that $255 000 for the duration of the mortgage. If 10 years later, you have paid down your mortgage to $233 000, you would still have the same premium for mortgage life insurance. The amount of coverage has dropped from $255 000 to only $233 000 as your mortgage amount has decreased.
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Mortgage insurance vs mortgage life insurance: Which is best?
There are similarities between these two types of insurance in that they both, primarily, serve to protect your mortgage lender. However, mortgage insurance is likely to be mandatory if your deposit is under a certain threshold, whereas mortgage life insurance is an optional, additional layer of protection.
Mortgage insurance is simply a protection for the lender that ensures they will not lose out if you default on mortgage payments. It is simply the lender taking insurance out to cover debt repayment that is risky for them due to your low deposit.
Mortgage life insurance specifically makes sure your mortgage is paid off in the event of your death. It does not protect in case of illness or injury and the pay-out will go directly to the lender rather than to your heirs.
Mortgage life vs life insurance: what are the pros and cons?
Now that we have defined mortgage life insurance, let's see how it stakes up with life insurance.
The primary and most important difference between mortgage life insurance and term life insurance comes at the moment the policies pay out. Mortgage life insurance only protects your mortgage and only in the event of the death of the policy-owner. The beneficiaries can pay off the mortgage but they are not able to use the money for anything else.
Life insurance gives freedom to the beneficiaries to use the money for whatever purpose they want. Of course, you may feel that paying off the mortgage is the most important goal and mortgage life insurance can make sure that this is the only thing the pay-out is used for.
|Type of insurance||Mortgage life insurance||Term life insurance|
|Who is the beneficiary of the policy?||The lender. In the event of a payout, they will use the insurance to pay off the mortgage.||Beneficiaries are designated at the time of purchase. They may use the money however they like, including to pay off the mortgage.|
|When does the coverage expire?||Your coverage will end when your mortgage is fully paid||The term is chosen at the time of purchase. It is not affected by the length of your mortgage.|
|What happens if you change your mortgage?||Mortgage insurance cannot be transferred, therefore if you change lenders, you must reapply for insurance.||Your insurance remains unchanged for the entire term specified within the policy|
|What happens if you die?||The coverage will pay off the balance of your mortgage. If you die and still owe $100 000, then the insurance will cover that amount.||Your beneficiaries will receive the full amount of your policy.|
|What if I get ill and can’t work to cover the mortgage payments?||A mortgage life insurance plan will not help in this situation. Loss of income is covered by disability insurance.||Disability is not covered by a life insurance plan.|
|How do premiums change?||The premiums will remain unchanged for the entire term of the mortgage even as you continue to pay down the mortgage.||Premiums could change in renewal if your life circumstances have changed.|
Advantages of mortgage life insurance
- You can guarantee how the pay-out will be used to make sure that it will only be used to pay off the mortgage on your house. If you choose a policy with level premiums and level death benefits, then in the event of a death, your mortgage will be paid off whether you die 5 years or 25 years into the coverage.
- Some pre-existing conditions may prevent you from purchasing traditional term life insurance. Choosing mortgage life insurance may allow you to avoid a medical exam and possible disqualification.
- Some providers of mortgage life insurance will pay back your premium (return of premium) if you outlive your term.
Disadvantages of mortgage life insurance
- Your heirs may need more flexibility in the event than you can predict. Mortgage life insurance severely limits their options. They can pay off the mortgage but if, for example, you left them large medical bills as well, they would be unable to use the death benefit to pay these off.
- Mortgage life insurance tends to have higher premiums than term life insurance.
- Even if your premiums are returned, their value will have been diminished by inflation.
Where can I find mortgage life insurance quotes?
Once you have secured your mortgage you may be approached by companies selling mortgage life insurance. These companies are usually banks that have business relationships with lenders and will have found out about your mortgage from public records.
If you would like to do your own research and compare the deals on offer, you can use our handy tool:
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Mortgage life insurance calculator
To calculate how much you could expect to pay into a mortgage life insurance policy and how much you would expect it to pay out in the event of your death, we invite you to use our mortgage life calculator tool.
By entering your age, the bank you wish to take the policy out with and whether or not you are a smoker, you will be able to make an estimate and strategize accordingly.
Besides mortgage life insurance, how else can you protect your mortgage?
For most Canadians, your home is your chief asset and largest investment. Of course, you want it to be secure! If you are still paying off your mortgage you might be worried that an illness or death might prevent you from completing payments which might mean your family or partner loses the house. For each risk there is a type of insurance that can give you peace of mind:
|Type of insurance||How it works|
|Traditional life insurance||Life insurance pays out to a person of your choice in the event you pass away unexpectedly. It will allow them to continue to pay off bills and cover daily living expenses including mortgage repayments.|
|Critical Illness insurance||Critical Illness insurance pays out if you are diagnosed with a severe condition that prevents you from working.|
|Disability insurance||Disability insurance is similar to critical illness insurance. It pays out if you are diagnosed with a condition or suffer an injury and are therefore unable to continue to work temporarily or permanently.|