Mortgage Life Insurance: What to Look Out For

a young family needs life insurance
Mortgage insurance is not
actually a good deal.

Many insurance brokers have explained the perils of mortgage life insurance to the clients.

Yet Canadians continue to buy these policies. Why are these policies such a bad deal? Well, there are numerous reasons why these profit pack policies are not a good value for Canadians.

1. The coverage is not portable: If the insured switches banks, moves, or sells their home, they will have to take out another policy. This could be a challenge if the insured’s health changes, and even still, they will get older, so the cost of traditional coverage will be higher.

2. The coverage declines as the insured’s mortgage declines: This means the insured gets less and less value for the premiums they’re paying. For example, a $500,000 mortgage insurance policy that starts off at $80 a month may seem like a pretty good deal, but as a mortgage reduces to, say, $300,000 and the premiums remain at $80 a month, the policy suddenly offers significantly less value.

3. The bank is the beneficiary: If the insured passes away, they don’t have the choice of choosing their beneficiary because under a mortgage insurance plan, the bank is the beneficiary. In contrast, under an individual life insurance policy, the insured can choose one or multiple beneficiaries. If interest rates rise in the future, it may make sense for the insured’s family to keep the mortgage in place and use the life insurance proceeds to cover other expenses. Unfortunately, a bank-owned policy does not offer this ability.

4. True Joint coverage: Mortgage insurance policies through a lending institution will simply pay off the mortgage balance, whereas an individual policy on two spouses would pay double the benefit if both of them die simultaneously. This can be a huge advantage to policyholders with young children. The extra proceeds that comes from both parents passing away would be a tremendous benefit to the surviving children. In contrast, mortgage insurance will only ever cover the actual mortgage, and with two small children with the home paid off and no other income coming in, it simply doesn’t cut it when it comes to the cost of living.

5. Mortgage life insurance on its own looks at a singular need: A proper and complete Life Insurance Needs Analysis looks at a variety of needs, which include the insured’s mortgage, other debts, lines of credit, final expenses, replacing lost income, and factors in existing assets and life insurance policies. The LSM Insurance Needs Analysis Calculator is a great place to start when figuring out your life insurance needs.

LSM Insurance president Chantal Marr points out that you should be very careful when answering the mortgage insurance application questions. Many of these applications ask questions like, “Have you ever had high blood pressure, high cholesterol, or diabetes?” If you answer these questions incorrectly, your family could be left in the cold at the time of claim. These ailments are very common and someone with high blood pressure would likely qualify for standard and sometimes even preferred rates on a traditional life insurance application, so weigh your options carefully.

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  • Hadley
    September 22, 2013 at 11:54 am

    Chantal, nice review of mortgage insurance plans. Much appreciated. I agree that these plans can be a “bad deal”. I prefer mortgage term life insurance with a level term of 20 or 30 years to match your mortgage loan. The term life plans offer greater flexibility, and the death benefit doesn’t go to the lender, but rather the beneficiary you choose to receive the benefit. The proceeds can be used for any purpose, including paying off the mortgage loan, and providing for your family. It just makes more sense to go with the mortgage term insurance plan over mortgage payment protection insurance.

    • LSM Insurance
      September 22, 2013 at 2:54 pm

      Thanks Hadley. The one exception to the rule might be smokers – many creditor insurance plans use blended pricing so some smokers especially older smokers enjoy lower pricing.