October 15 2020
A special guest post from your friends at PolicyMe.
Buying a new home is exciting, but it’s also one of the biggest purchases you’ll ever make. In fact, just to seal the deal, you’ll probably need a mortgage so that you don’t have to pay the entire cost of the home up front.
A mortgage lets you buy the home that fits your family’s needs. But it also means that until you pay it off, which could take years or even decades, you’ll owe a lender money.
It’s never fun to have debt on your shoulders. But having a balance on your mortgage is more than just annoying or inconvenient. After all, if you contribute to your home’s mortgage payments and you die before the mortgage is paid off, it could leave your family in a sticky financial situation. That’s why you might have a big question on your mind: “Should I buy mortgage life insurance?”
Buying mortgage life insurance might seem like a good idea, but is it really the best life insurance option for your new home needs? Maybe not.
In this article, we break down the differences between mortgage life insurance and term life insurance. And we explain why for most people, term life insurance offers better protection against mortgage debt.
Mortgage life insurance is designed to protect your family against mortgage debt. It’s typically sold by banks and mortgage brokers.
Here’s how it works: When you buy mortgage life insurance, you pay monthly premiums to cover the cost of your coverage. If you die before your mortgage is fully paid off, your insurer will pay the remaining balance of your mortgage.
Why is this helpful? It means that your family won’t have to figure out how they’ll afford the monthly mortgage payments without the help of your income. And they won’t have to worry that they’ll be unable to afford the mortgage and need to sell the home.
Buying mortgage life insurance to protect your family might seem like the responsible thing to do. After all, you’d hate to leave the people you love without a roof over their head if you died earlier than expected.
Keep in mind, though, that mortgage life insurance isn’t mandatory if you want to get a mortgage in Canada. And for most people, there’s a better way to protect your family against mortgage debt: buying term life insurance.
Term life insurance is a financial safety net for your family. It protects them in the event that you die earlier than expected and your income is no longer around to help pay for family expenses.
On the surface, it works in a way that’s similar to how mortgage life insurance works: When you buy a term life insurance policy, you pay for monthly premiums for the length of time that you want coverage for (usually 10, 20, or 30 years). If you die while your policy is active, your insurer will pay your beneficiary a death benefit.
Your death benefit is a tax-free lump sum payment that your beneficiary can use in any way they’d like. For example, they can use the death benefit to pay off the mortgage, fund your kids’ postsecondary education, or cover basic daily expenses.
In sum, term life insurance ensures that even if your income suddenly disappears because you die, your loved ones will be able to pay for their expenses and maintain their quality of life.
Both mortgage life insurance and term life insurance can protect your family against mortgage debt. But here’s how they differ and why term life insurance is usually the better option.
Mortgage life insurance ensures that they’ll have money to cover the remaining balance of your mortgage if you die. But you can’t use it to protect your family in any other way.
In comparison, when you buy term life insurance, you can select a coverage amount that will cover all the debt and expenses that you want to protect your family from—not just your mortgage. Do you have a child who plays an expensive competitive sport? A spouse who requires extensive uninsured medical care? Or an aging parent who lives with you? Whatever your family’s needs are, you can use term life insurance to cover them.
With mortgage life insurance, the beneficiary is your mortgage lender. So if you die before your mortgage is paid off, the money from your mortgage life insurance policy will go straight to your lender. Your family won’t see any of it.
On the other hand, if you buy term life insurance, you’ll get to choose your beneficiary (or beneficiaries). And all of the money from your death benefit will go directly to them. When your loved ones are in control of your death benefit, they can use the money in the way that best suits your family at the time.
For example, when you bought your policy, your mortgage might have been the primary expense that you wanted to cover. But at the time of your death, your family might have other major expenses that they’d prefer to spend the money on. Term life insurance gives your family the power to pay for the expenses they’ll actually have when you die, not the expenses you anticipated they’d have when you bought the policy.
Mortgage life insurance is usually pretty easy to get. You won’t have to do a detailed medical exam. Instead, you’ll usually be approved on the spot after answering a few simple questions.
Sounds great, right? But there’s a catch.
Insurance companies charge you for coverage based on your risk of dying while holding your policy. Because insurers don’t do a deep dive into your medical history when selling you mortgage life insurance, they don’t know how risky you are to insure. So what do they do? They assume you’re a high-risk applicant and charge you higher premiums as a result.
When you buy term life insurance, in comparison, you usually have to complete a detailed medical review. It may not be fun to get blood drawn or pee in a cup. But if you’re young and relatively healthy, your insurer will categorize you as a low-risk applicant. And you’ll pay less for coverage as a result.
Wondering how premiums for mortgage life insurance and term life insurance compare?
Check out these sample monthly rates for TD mortgage life insurance vs. Manulife term life insurance. Note that the term life insurance rates are for a male non-smoker with a 20-year policy term.
TD mortgage life insurance rate per month
Manulife term life insurance rate per month
You’ll see that for every age and coverage amount, the mortgage life insurance rate is higher than the term life insurance rate.
In some cases, this difference is pretty small. For example, for a 30-year-old buying $250,000 of coverage, mortgage life insurance costs an additional $5/month. This works out to an extra $60/year or an extra $1,200 over 20 years.
But in other cases, the difference is much larger. For instance, for a 40-year-old buying $1,000,000 of coverage, mortgage life insurance costs an additional $116/month. This works out to an extra $1,392/year or an extra $27,840 over 20 years. Imagine what you could do with an extra $27,840 in your bank account!
Not only is mortgage life insurance more expensive, but the size of your benefit shrinks over time. Why? Because mortgage life insurance covers the remaining balance on your mortgage. You pay off a portion of your mortgage with each monthly payment. So for every month that goes by, your mortgage life insurance benefit decreases even though your premiums remain the same. Your coverage will also end entirely once you pay off your mortgage.
In comparison, with term life insurance, your death benefit remains the same throughout the length of your policy. In addition, your coverage won’t end until you reach the end of your policy term. This means that your family will stay protected even if you pay off your mortgage before your policy expires.
Mortgage life insurance is tied to your mortgage. So if you switch mortgage lenders, you’ll have to apply for mortgage life insurance all over again. And because you’ll probably be older at this point, you’ll likely end up paying even more for coverage.
Term life insurance, on the other hand, is completely independent from your mortgage. So you can switch mortgage lenders at any time while keeping the same insurance policy.
Term life insurance can give you all the protection that mortgage life insurance offers (and more). And on top of this, it provides coverage that’s more flexible and affordable.
So unless you wouldn’t qualify for term life insurance because of a pre-existing health condition, term life insurance is the best way to protect your family from mortgage debt. And it’s the only mortgage protection you need.
Buying a home and securing a mortgage is a big financial responsibility. So it makes sense to protect your family against mortgage debt.
But remember that no matter how compelling that pitch for mortgage life insurance sounds, term life insurance is usually the better way to insure your mortgage. Term life insurance lets you protect your family from all debt and expenses you contribute to. And in addition to being more flexible, it’s cheaper as well!
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