When many of us are taking out mortgages with the bank, we are asked about adding on mortgage life insurance. We are told that it usually costs just a few extra dollars a month and that it can be easily added to our monthly payment.
Mortgage lenders sell this optional product, and their pitch is that mortgage life insurance pays off your mortgage balance in the event of your death. It will ensure that your estate doesn’t owe any money on your home; the mortgage payments will stop, and your family will not have to worry about having to make payments that they may not be able to afford on their own, without your income.
However, it’s actually more of a protection for the bank. It protects the bank’s loan to you so that in the event that you die, your mortgage will be paid off in full.
What many don’t realize is that mortgage life insurance is not mandatory from your lender in Canada and that there are, in fact, several smarter options out there to consider. Better products exist to protect your family from financial harm if you can’t make your mortgage payments.
That’s because mortgage life insurance only protects the mortgage itself. While this is certainly significant, as your mortgage balance will be reduced to zero, there is no actual life insurance component per se. Should there be an unexpected death, there will be many other expenses for your family to pay, beyond just the mortgage itself. More traditional life insurance gives your family greater flexibility, more control and more protection.
To start, this product is portable and guaranteed renewable regardless of your health status; as long as the premium is paid, coverage is fully portable across mortgages. With mortgage life insurance from a financial institution, you must re-qualify if you change banks or homes. If your health were to deteriorate, coverage might not be available.
It’s also flexible: your beneficiary has the choice to pay off the mortgage or address other financial obligations. When you deal with a bank, only the outstanding mortgage is paid, and it is paid to the bank.
Stability is another great selling point. You can apply to purchase both critical illness and disability riders on your policy. You also won’t have to keep re-qualifying if you change banking institutions or buy another home. Because the chance of becoming critically ill outweighs the probability of dying prematurely, this type of coverage is both important and practical. With banks, if your health were to deteriorate, insurance coverage (including disability and critical illness) may not be available.
If feeling in control of your affairs is important to you, only you—and no one else—has the power to cancel the policy, as long as you pay your premiums. The policy is not owned by the bank, but by you.
Coverage also stays the same regardless of your mortgage balance. When dealing with a financial institution, your coverage ends when your mortgage is paid or the house is sold or refinanced.
It can help to think about where you’d want the focus to be, were such an unfortunate event to happen. Your beneficiaries would be top of mind—not the bank.