I often get the question, "Is mortgage insurance mandatory?" and I have to clarify because clients asking are asking about one of 2 different types of insurance. They are asking about default insurance or life insurance.
No, it is not mandatory to take mortgage life insurance when you set up your mortgage with a lender. Mortgage life insurance is set up to cover the outstanding balance of your mortgage over time and pays off your mortgage if you die. This coverage is a reducing balance coverage with a fixed fee.
Most banks (lenders) will offer you life insurance coverage when you set up a mortgage with them. Let's review how mortgage life insurance works.
How does Mortgage Life Insurance Work?
Any time you purchase something, it's really important to know what you are buying. As a mortgage broker, I am required to offer mortgage life insurance, but I also want my clients to know what this is and what it covers.
In fact, because I believe that clients should have access to choose a better option, I chose to become licensed as an insurance broker too. That way, I can offer clients a wider array of options that will fill my clients specific needs, instead of being forced to recommend something that I'm not a fan of.
That being said, let's review some of the key elements of mortgage life insurance coverage.
- Decreasing Coverage Life Insurance
- Coverage pays the bank (lender) directly
- The premium payments remain the same for the life of the mortgage
- Coverage is cancelled if you change banks
Decreasing Coverage Life Insurance
The mortgage life insurance will cover the balance of your mortgage. As your mortgage balance reduces, the coverage reduces. With the low interest rate environment that we are in, your principle balance reduces quite rapidly.
If you were to choose life insurance through a life insurance broker instead of your lender or a mortgage broker, then the coverage will have a fixed amount for a fixed payment over a contracted period of time.
The best comparison to mortgage life insurance is term life insurance. Mortgage life insurance is effectively a term life insurance policy with a decreasing term over a 25 year contract. At the end of 25 years, your mortgage is paid off and you won't have coverage anymore.
Let's look at an example to clarify what I mean.
You purchase a home and set up a mortgage for $340,000. You take a 5 year term mortgage and the bank offers you mortgage life insurance with payments of $37.49 per month. You are female, 36, non-smoker.
You speak with a life insurance broker and receive a quote for term life insurance for 25 years. The insurance broker suggests $350,000 term 25 life insurance policy with a payment of $33.84 per month. Note, you could also choose a 10 year term or a 20 year term. (I selected a 25 year term to compare apples to apples!)
The payment difference between the 2 is not too much, just $3.65 per month. What does the insurance look like after 5 years?
If you had chosen the mortgage life insurance, you would have paid $3.65/month extra for 5 years or 60 payments. You would have made monthly payments on your mortgage of $1,555 and the balance after 5 years would be $288,865. This amount would be your life insurance coverage.
That is, your coverage with mortgage life insurance is equal to your mortgage balance over time.
If you had chosen the term life insurance, you would still have $350,000 of coverage. You would have paid for the last 5 years and the payments would be contractually guaranteed until the end of the 25 year term that you selected.
In this example, the mortgage life insurance coverage is slightly more expensive than the comparable term coverage. Sometimes, the mortgage life insurance is slightly cheaper.
It's not always about the cost. Know what you are getting before you choose something that's a couple bucks cheaper, but doesn't offer the same options or coverage over time!
Coverage Pays the Bank
If you set up mortgage life insurance through your bank, then the coverage is for your life, but the benefit pays off the mortgage. You do not have the option to choose beneficiaries because the bank is effectively your beneficiary.
The bank will tell you that by paying them directly, the mortgage life insurance will cover any potential penalty. Therefore, if you pass away your home will move to your estate without any mortgage owing.
Your family would benefit based on how you wrote up your will and what has to be done with your home when you pass away. The bank benefits because they get all their money back right away.
At this point, I would also recommend that you set up a Will. Once you have assets, it's important to draw up a Will so that you can allocate your assets to the people you care about, rather than having someone else potentially decide who receives your assets.
If you decided to choose term insurance instead, then you can decide on the beneficiaries of your life insurance policy. Your insurance policy can provide money to your spouse, or your kids or whom ever you wish. You can choose multiple beneficiaries and each can receive different amounts as you decide.
If there is a mortgage owing at the time of your passing, then your beneficiary can decide what they want to do with the money. They can pay off the mortgage, or keep the mortgage until the home is sold. They could pay down the mortgage and keep cash to help with making payments in the future.
By choosing a term insurance policy instead or mortgage life insurance, you are offering choice to your beneficiaries. You are have more control over what happens with your policy and your Will.
Let's look at how the premiums work for a mortgage life insurance policy.
The premium payments remain the same for the life of the mortgage
For most life insurance policies, term policies or mortgage life insurance the premium will be calculated at the beginning of the contract. That payment will be the same for the life of the contract.
For mortgage life insurance the premium is typically calculated on the amortization of the mortgage. However, sometimes it's simply calculated based on a 25 year amortization.
If you pay off your mortgage faster, you are actually paying more for the insurance coverage than you should be. Most lenders don't recognize this and won't reduce mortgage life insurance payments if you have accelerated your mortgage.
I worked for a bank in the past and if clients paid a large lump sum toward their mortgage, we would provide them with a premium adjustment on their mortgage life insurance coverage, but the client had to ask. Not too many did.
If you were to choose a term life insurance policy instead, then you would have the same coverage for the full term. Your payments would be the same for the full term of the contract.
If you paid off your mortgage faster and passed away, your beneficiaries could use life insurance to pay off the mortgage and there would be more money left for their own use.
Most people don't pay off their mortgage to much faster but some do. Those people aren't getting the full benefit of the policy that they chose unless they chose a term policy.
Coverage is Cancelled If You Change Banks
This is a big one. Most people don't think about the consequences of their choices. It's not your fault. For most people, they only purchase a home a couple of times in their life time.
It's really difficult to think of all the possible scenarios and outcomes based on all the different factors that are thrown at us during the home purchase process.
When you choose mortgage life insurance with your bank, then that coverage is for that mortgage. At the end of the term, if you shop around and find that you could get a better deal with another bank, you would lose the life insurance that you had set up in the beginning.
If, for some reason, you don't qualify for life insurance anymore, then you have to make a choice. Stay with than bank, or cancel the only insurance that you have.
I have seen this situation far too many times. I've worked for a couple of Canada's biggest banks. I've had clients who were selling their home and purchasing a new one. One of clients didn't qualify for insurance anymore.
They had no choice but to stay with their bank. They couldn't shop around. I was able to move the insurance over to the new home, but it was for a reduced amount. That is, the coverage was for the balance that was remaining and for the remaining amortization.
This client didn't get full coverage but there was some coverage and that was better than nothing.
Had this client chosen a Term Insurance Policy when he first set up his mortgage, then he would still have the full amount. He would also have the option to convert that policy to a permanent life insurance policy so that he would never lose it, regardless of his medical situation.
When I speak with clients, I always offer them insurance. If they qualify, they should take some. If a client is young, they often say that they don't need the insurance. They don't have any dependents, etc.
That's true. However, they are young. It's easier for them to qualify. The coverage cost is really inexpensive. If something happens in the future that prevents them from qualifying, they have something in place when they did qualify.
Choosing a mortgage life insurance policy can certainly give you protection and pay off your home if something happens, but for a very similar cost (sometimes less) term insurance offers so many more options and choices and doesn't lock you into one lender forever.
In my opinion, Life Insurance requires a conversation. Some people don't want this conversation. It can be uncomfortable.
There is a website that I like to refer clients to. This website will let you make your own calculations before speaking with anyone. The calculator will show Life Insurance coverage as well as Disability and Critical Illness. Click here
Let this be a starting point. There are also less expensive options. You could choose a shorter term coverage or less insurance. You can also choose more insurance. There are many different options. I like this calculator because you can get some numbers before you have to provide your personal details. Calculate life, disability & critical illness coverage costs.
I'm Biased against Mortgage Life Insurance
I have to admit. I'm not a fan of mortgage life insurance. I believe there are better options for you and your family. I believe that every single person who has a mortgage, should have insurance. I just don't like the limitations of the mortgage life insurance that is offered by most brokers and banks.
I have seen so many different statistics about how many people should have it. About how many people say they don't have it but are thinking about it. Etc. Etc. If you don't have any coverage, then contact someone to review your options. Try my calculator. I'm not a pushy insurance guy.
I just want to make sure that my clients are covered. I'm pretty passionate about that! I made a YouTube video about insurance, check it out. I saw a video about a dad reading a bedtime story to his kids. That video really touched me.
I used to read a book called, "Love You Forever" by Robert Munsch to my kids when they were little. I couldn't read it to them every night, because I could barely finish it. If you haven't read it, you should. It's such a nice book. I (and my kids) really love all of his books.
Anyway, the video really captured the need of every family to provide protection for their family. Let's chat a little bit about the other coverage options that are available when you set up your mortgage.
Is mortgage life and disability insurance worth it?
It's better to take some insurance than to take nothing. If you are in the process of buying a home, you should meet with an insurance broker who can review your whole financial picture and make a holistic recommendation rather than a recommendation based only on one product.
I use this website to get some calculations for life insurance, disability and critical illness. Then I have an idea what my budget needs to be and whether or not I can afford one two or all of these insurances.
Another thing to consider is the benefit. Life insurance is a death benefit. Which means that you are paying for a benefit that someone else will use. If you have a spouse or small kids, then it's important to help them if you aren't around.
We have gone into some detail on this page about life insurance. I believe that everyone should have some. You don't have to choose the full mortgage balance. I've had clients who decided to set up life insurance for half the mortgage balance. That payment was more affordable and within their budget.
Disability insurance is a living benefit. You will benefit from this insurance if you purchase it. If your employer offers you short time and long term disability benefits, then you may not need as much disability insurance for your mortgage.
If you don't have any other coverage, then disability insurance can protect you, your family and your home in the event of you getting disabled.
When I speak with clients about disability insurance, I always ask this question: If you had a machine that make money for you every single day. would you take care of it. Would you buy insurance for it to make sure the money keeps coming out even if the machine breaks?
Of course your would. If that machine was you? Wouldn't you want to buy insurance to make sure that if you are unable to work for one reason or another, you will still receive some income?
Disability insurance is one of the least purchased insurances, because it's not super cheap. However, it's priced that way because the changes of a disability are much greater than the changes of death.
Critical illness isn't offered by every lender but with is offered by some. Critical Illness is a living benefit. It's also more expensive than life insurance for the same reason disability is more expensive.
The thing I like about critical illness insurance is that is wasn't created by an insurance company. Critical Illness insurance was actually invented by a medical doctor. He noticed that because of medical advances, patients are suffering major health issues and surviving.
He also noticed that his patients who are surviving are in getting into financial difficulty because of medical costs, lost work and other reasons. He invented Critical Illness insurance to help people in these situations.
I believe that everyone should also have some sort of critical illness policy to protect themselves and their family.
Like all insurances, you never hope to receive the benefit, but if something happens and you do receive the benefit it's always welcome.
If you want to get an idea about what this type of insurance could typically cost you, without obligation, visit my life & disability & critical illness insurance calculator.
You can see your results without having anyone bug you. If you want to chat, or have a question or want to find out more, then fill in the form or call the number on that page.
Frequently Asked Questions:
Do I have to take the life insurance that is offered by my broker or my bank?
No, you do not have to take life insurance that is offered by your broker or your bank. In fact, you should speak with an insurance broker to review your life insurance needs. Review your whole financial picture and insurance needs before jumping into a single product based recommendation.
When ever you have a major life event, like getting married, having kids, buying a home, buying a car, buying investment properties, etc., you should review your insurance needs.
In my opinion, an insurance broker who has access to multiple companies could offer you more choice, knowledge and experience than a banker or company insurance guy will.
Does mortgage insurance pay off your house if you die?
If you chose mortgage life insurance, then yes mortgage life insurance will pay off your house if you die. Mortgage default insurance will not pay off your home if you die. Make sure you know what mortgage insurance that you do have.
Do I need life insurance if I have no debt?
If you have no dependents, if you are single and have sufficient cash to pay for your burial, then you don't need life insurance. However, if you plan to have kids one day, then it could be beneficial to purchase life insurance.
Every situation is unique. Without knowing your complete financial picture it's really difficult to make the appropriate recommendation. One of the biggest reasons that I've seen with my clients is protecting their future.
If you are in a good financial and you qualify for life insurance, then why not buy it. One day, something might happen and you are no longer insurable. If you had purchased life insurance when you did qualify, then you have options.
If you are no longer insurable, you can't go back in time and apply. It's too late. Financial decisions made today, can provide you so much benefit in the future.
For a 25 year old male in standard health, he could purchase a $500,000, 10 year term life insurance policy for around $25/month. He could choose a $500,000 20 year term insurance policy for just $33/month.
If you are single, with no dependents and you purchase a life insurance policy, you aren't choosing this for your family. You are purchasing this policy to protect your future insurability.
This is a strategic purchase to ensure that if & when you need life insurance, that you qualify to have it.
I trust that the information provided here will give you a much more clear understanding about mortgage life insurance and how that compares to term insurance.
I personally believe that term insurance is a better choice, but mortgage insurance can be a much quicker application and mortgage life insurance is much better than nothing.
If you have questions about your own specific situation, please connect with us. Call our number, listed at the top of this page, or connect through my about page.