What is mortgage life insurance?

Many Canadians carry some form of life insurance, even if it’s just a small policy through work. Life insurance is a valuable income replacement if the worst should happen to you or your partner.

Mortgage life insurance, on the other hand, is a bit different from a regular life insurance policy. Instead of replacing an income, mortgage life insurance covers the mortgage balance if you or your partner dies.

The benefits

When you’re applying for a mortgage, chances are your broker or banker will ask if you’d like to protect yourself with mortgage life insurance. Carefully, you consider the options. Without mortgage life insurance, you could leave your partner saddled with a six figure debt if you die. With mortgage life insurance, you can pay a bit extra each month to be sure that that situation never occurs.

Mortgage life insurance applications are easy and quick. There are often no medical questions, meaning you’re likely to be approved for coverage even if you suffer from an illness or a disability. To make payments more convenient, mortgage life insurance premiums can be rolled into your existing mortgage payments, meaning you can set-it-and-forget-it.

Finally, you usually have the option to add critical illness protection to your mortgage life insurance policy. This add-on covers your mortgage payments for a certain amount of time if you or your partner becomes critically ill.

The downside

Unfortunately, there are downsides to mortgage life insurance. Critics point out that regular life insurance policies are better than mortgage life insurance policies because they’re often cheaper and more flexible. With a regular life insurance policy, beneficiaries can use a payout for whatever purpose they want (credit cards, funeral expenses, etc.) instead of simply paying down the mortgage.

Mortgage life insurance policies are also non-transferrable, meaning that if you sell your house you will lose your policy and your premiums. If you buy a new house and get a new mortgage, you will need to re-qualify for mortgage life insurance.

Critics will also argue that the math doesn’t add up – the longer you hold a mortgage life insurance policy, the less money you will receive if it pays out. The reason for this oddity is that your mortgage balance declines as you continue making your mortgage life insurance/mortgage payments.

For example, if you take out a $500,000 mortgage and die within the first year, your beneficiary might receive upwards of $480,000 – the balance after a year’s worth of payments. However, if you die after 10 years, the mortgage balance will have declined to about $340,000.

Mortgage life insurance is a quick and easily obtained form of insurance that can keep people out of a financial bind. But it's not always your best option. As is so often the case, it's worth contacting your broker to determine whether your best move is mortgage life insurance or regular life insurance. That way you can know what's best for your own situation.