Mortgage Life Insurance: 3 Things You Need to Know

While you were signing the paperwork for your mortgage, did a bank employee ask you to consider purchasing mortgage insurance protection? You were probably told “…it will pay your mortgage if you die…just a few medical questions… it’s inexpensive…”. While that person may have had the best of intentions, he or she probably lacked the training needed to make you aware of important contractual details and how these compare with other insurance protection options. 

Here are 3 important things you should know about most mortgage insurance policies: 

1. You do not control the benefit

In the event of your death the proceeds of your insurance is automatically used to pay off your mortgage. Becoming mortgage-free may be a desirable result, but what if there is an unforeseen need for extra money after you die? Perhaps your home needs major renovations or a child’s university costs need to be paid. With control of the life insurance proceeds, your spouse could pay off all or a portion of the mortgage and use the remaining money to cover other expenses. Another possibility is that it could make more financial sense to invest the money rather than immediately pay off the loan if your mortgage is locked into a very low interest rate. 

Mortgage insurance can only be used to pay off a mortgage. A personally owned life insurance policy offers your family the freedom to decide how to use the proceeds. 

2. You could lose your insurance protection 

Mortgage insurance is only in effect for as long as your current mortgage contract. If you decide to renegotiate your mortgage (maybe you want to finance a large renovation) or move to a new lender, you may have to apply for new mortgage insurance coverage. If you have had a change in health, you may be unable to qualify. This leaves you in the position of either losing your insurance or being forced to accept an undesirable financial arrangement with your current lender. 

With a personally owned life insurance policy, your coverage is unaffected by any changes you make to your mortgage or lender. In addition, you are never at risk of losing your current insurance because of a change in your health. 

3. Cost

You may be surprised to learn that a typical mortgage insurance policy can be significantly more expensive than a comparable amount of personally owned life insurance.

To illustrate this difference, take an example of a male non-smoker, age 31, with a $250,000 mortgage. The average monthly premium for 10 years for life insurance from the Canadian Bar Insurance Association (CBIA) would be just over $23 per month. A major bank’s mortgage insurance for the same amount would cost just over $32 per month (40% more). In addition, at the end of 10 years the CBIA coverage would still be $250,000, while the mortgage insurance policy would have reduced by over $50,000 to reflect the current outstanding mortgage. 

Are there any advantages to mortgage insurance?

For some people, the convenience and speed of issue of buying a lender’s mortgage insurance outweighs the contractual advantages and cost savings of buying elsewhere. Some may also be attracted to the minimal underwriting requirements typical of these polices. If that’s you, I suggest you read this CBC Market Place article “Mortgage insurance, not always a sure thing”.

Remember, if you are healthy, you have the freedom to make your own life insurance choices. Always compare your options before you buy. You may be very surprised by what you’ll learn.

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more, the CBIA offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local insurance sales representative who can assist you with your insurance questions and needs.