What Is Mortgage Life Insurance?
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We all encounter the unexpected from time to time, so it’s important to be prepared by creating and periodically reviewing your protection strategy. If your household suddenly loses the primary earner due to injury, illness, or death, you want to ensure your family can make mortgage payments or meet other obligations.
Mortgage life insurance is a type of protection that will give your family peace of mind if the unexpected happens. With mortgage protection insurance, Canadians can safeguard their biggest investment, their home, if the primary earner cannot work due to injury, illness, or death.
Key Takeaways
- Mortgage protection insurance offers coverage on your mortgage that includes life, critical illness, disability or job loss.
- Mortgage life insurance will pay off your remaining mortgage balance in the event of unexpected death.
- Mortgage life insurance premiums vary based on your age and mortgage amount.
What Is Mortgage Protection Insurance?
Mortgage protection insurance is a type of insurance offered when you take out a mortgage. This coverage includes life, critical illness, disability, or job loss and is optional. You can choose to apply for this coverage at any time during the life of your mortgage. These insurance protections can help you make mortgage payments or help pay off the balance owing on your mortgage should you become unemployed, injured, disabled, critically ill, or die. Mortgage protection policies, benefits, and limits vary between providers, including age limits for when they are terminated.
What Type of Mortgage Protection Insurance Do You Need?
Mortgage life insurance pays off your remaining mortgage balance, so in the event of an unexpected death, the remaining mortgage balance would be paid in full. This is useful if you have dependents or a spouse who are not primary earners and may be unable to continue making mortgage payments without your income. This can help keep your family in their home if the primary income earner passes.
Mortgage critical illness insurance covers you if you are diagnosed with a specific critical illness, as outlined in the lender’s coverage terms. This coverage will pay your outstanding mortgage balance in a lump sum up to a specified amount. Typically, pre-existing medical conditions are not covered, and specific illnesses may not be covered or excluded under this insurance product.
Mortgage disability insurance covers your mortgage payments in the event you become disabled and are unable to work. This coverage will make mortgage payments for you during a set period of time. This type of coverage typically has a maximum monthly coverage amount, with total coverage, including multiple occurrences over a lifetime, extending for up to 24 months. Some lenders will have a 60-90-day waiting period before this coverage kicks in.
Mortgage job loss insurance covers your mortgage payments if you become unemployed through no fault of your own. This coverage will make mortgage payments for you during a set period of time. This type of coverage typically has a maximum amount to cover monthly mortgage payments, with coverage extending for up to 6 months over your lifetime.
Advantages of Mortgage Life Insurance
Mortgage life insurance offers many benefits beyond paying off the remaining balance on your biggest asset in the event of death. It provides a tax-free lump sum that pays off your remaining mortgage balance, allowing your loved ones to free up money that may come from other insurance policies for other expected and unexpected expenses. Mortgage life insurance benefits are non-taxable, so that the full benefit will go toward your mortgage without tax implications.
Payments are stable and predictable, as your premiums will only change if you need to refinance or increase your mortgage balance. Mortgage protection insurance is flexible, allowing you to choose your coverage based on your needs. You can choose to have life insurance or add critical illness, disability, or job loss insurance for extra peace of mind.
How Much Mortgage Life Insurance Costs
Mortgage life insurance is charged as a premium based on age and the mortgage amount when you apply for insurance. The premium is typically calculated per $1,000 of mortgage balance.
For example, the premium for ages 30-35 could be $0.15 per $1,000 and for ages 36-40, it could be $0.21. If you have a $500,000 mortgage, you can expect to pay $75 per month if you’re between 30 and 35 and $105 per month if you’re between 36 and 40 for mortgage life insurance.
If you purchase protection through your lender, the premium is added to your mortgage payment. However, if you purchase it through a third party, the premium is debited separately from your mortgage payments. It remains portable between lenders without needing to re-qualify at a higher premium as you age.
Your habits, such as if you’re a smoker, may also affect the premium you are charged. Some lenders may offer discounts if you choose multiple insurance products, such as adding critical illness or disability (multi-product discount). Premiums may vary, so it’s important to check with your provider about what they charge for premium rates.
Important: Consider accepting the lender’s mortgage protection while shopping for better options when getting a new mortgage. This can provide immediate coverage until your mortgage closes. If you die before closing, the mortgage could be paid off in full, even without paying a premium.
Where to Get Mortgage Life Insurance
Your lender can offer mortgage life insurance, or you can purchase it through an insurance company. If you purchase mortgage life insurance through your lender’s insurance provider, it is purchased as a group plan, and you will have less flexibility in controlling what happens with the policy.
If you switch lenders, your mortgage life insurance cannot be moved with the mortgage, so you will lose coverage unless you re-qualify through your new lender’s insurance provider. If you pay off the mortgage, your coverage will end since the mortgage is paid off. In the event of death, the benefit will go directly to the lender to pay off the mortgage.
If you purchase mortgage life insurance through an insurance company, you will have greater flexibility in controlling what happens with the policy. Additionally, your mortgage life insurance policy remains in effect, following you with your mortgage even if you switch lenders. In the event of death, the policy will pay off your mortgage directly.
Mortgage Life Insurance vs Term/Permanent Life Insurance
Mortgage life insurance is a specialized product designed to protect your home. It differs from other life insurance options in that the payout is tied to your mortgage balance rather than a set policy amount. Mortgage protection insurance will go to the lender to pay off your remaining mortgage balance rather than to the beneficiaries. Coverage automatically decreases over time as it only covers your decreasing mortgage balance.
Term life insurance provides temporary coverage for a fixed period, such as 5, 10, or 25-year terms. If the policyholder passes during the term, the beneficiaries will receive the tax-free benefit paid out. Unlike mortgage life insurance, term life insurance has an amount payable that won’t decrease over the policy term. This type of life insurance may be convertible to a permanent life insurance policy.
Permanent life insurance offers lifelong coverage as long as premiums are paid. As with term insurance, the amount payable to your beneficiaries won’t decrease over the policy’s lifetime. In addition to the death benefit, this type of policy accrues a cash value over time that you may be able to access through cash withdrawals or loans. However, the amount will be taxable if cash is accessed through the policy.
| Mortgage Life Insurance | Term Life Insurance | Permanent Life Insurance | |
|---|---|---|---|
| Coverage | Coverage extends for the duration of your mortgage or until the insured parties hit the termination age. Coverage will end if you switch to a new lender, and you must re-qualify with the new lender. |
Coverage is for a set timeframe (ex. 10 years) or until the insured party reaches termination age (typically 70/71) | Coverage extends for your lifetime or until the insured party reaches termination age (typically 85). |
| Beneficiary | Your mortgage lender | Your designated beneficiaries (ex. spouse, children, etc.) | Your designated beneficiaries (ex. spouse, children, etc.) |
| Benefit Amount | Equal to the outstanding balance on the mortgage | Equal to the amount of coverage you choose. | Equal to the amount of coverage you choose. |
| Premium | Premiums remain fixed and unchanged unless you change your mortgage balance. They are calculated or re-calculated based on age and mortgage amount when you apply or prepay your mortgage. Premiums may also change if you switch your mortgage to a new lender, as premiums vary by lender. |
Depending on the policy, premiums may be fixed, increase with age, or at each renewal. They are typically calculated based on age, gender, medical history, and coverage amount. |
Depending on the policy, premiums may be fixed or increase with age. There may be options to pay the premium for a set number of years or throughout the policy’s life. They are typically calculated based on age, gender, medical history, and coverage amount. |
Mortgage Life Insurance vs Mortgage Insurance
It’s crucial to differentiate between mortgage life insurance and mortgage insurance. Although they sound similar, they are entirely different types of coverage.
Mortgage life insurance is a policy designed to pay off your mortgage in the event of death. This insurance benefits the policyholder’s beneficiaries by paying off the mortgage in full and allowing them to keep their home mortgage-free.
Mortgage insurance, or default insurance, is mandatory in Canada for mortgages with a downpayment of less than 20%. This insurance protects the lender by paying the remaining mortgage balance if you default on your mortgage payments. It does not benefit the mortgage borrower, guarantors or beneficiaries. If you default on your mortgage and have default insurance, the insurer will compensate the lender and pursue you or your estate for the difference in the event the sale of the property and expenses leave a balance owed.
Frequently Asked Questions
What is mortgage life insurance?
Mortgage life insurance is a policy that pays off any outstanding mortgage balance in the event of death.
Is mortgage life insurance mandatory in Canada?
Mortgage life insurance is not mandatory in Canada. It is an optional product you can agree to add when setting up your mortgage, renewing, refinancing or at any time during the mortgage.
What are the benefits of mortgage life insurance?
Mortgage life insurance provides the benefit of a tax-free payment of your remaining mortgage balance.
How does mortgage insurance work in case of death?
If you have a joint ownership mortgage, the surviving owner will be responsible for keeping mortgage payments current. Nothing happens with your mortgage default insurance as the mortgage is up to date on payments. The same is true if you are a sole owner and have someone inherit the property or have the estate settle it. As long as mortgage payments are current, nothing will happen with mortgage default insurance.
If the joint owner or estate cannot keep up with or doesn’t make payments, mortgage default insurance will protect the lender by compensating them for the mortgage balance in the event of default. The insurer will then go after the surviving joint owner or the estate to cover any mortgage costs or expenses they could not recoup from selling the property.
What is the age limit for mortgage life insurance?
The termination age limit for mortgage life insurance is typically around 70 or 71 years but could vary depending on the lender or insurance provider.
Do banks and lenders offer mortgage life insurance?
Banks and lenders offer mortgage life insurance that you can apply for when you obtain your mortgage or at a later date. Life insurance is through your lender as a group plan and tied to a specific mortgage; it cannot be transferred if you switch lenders.
Final Thoughts
Homeownership is a major milestone, but it comes with significant financial responsibilities. The thought of an unpaid mortgage burdening your loved ones can be overwhelming. That’s where mortgage life insurance comes in as a powerful protection strategy.
While not required, it offers peace of mind and financial security, ensuring your family won’t face the double hardship of grief and ongoing mortgage payments if the unexpected happens. It’s a way to protect your loved ones and legacy, allowing them to focus on healing and moving forward without additional financial stress.
Contact our mortgage experts to see if adding mortgage life insurance can help you protect your mortgage and financial plan.
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