Most of us don't like thinking about death, or the loved ones that we'll leave behind. In that instance, your mortgage is probably one of the last things you want to think about. Unfortunately, it doesn’t go away; it’s still going to be sitting there, waiting to be paid.
Whether or not you’re married, most homeowners have some sort of life insurance that covers their basic expenses for a certain period of time after a partner dies. Many lenders also offer a product called mortgage life insurance, which is different from other life insurance products offered by insurance companies. Mortgage life insurance seems like a good idea. It is specifically designed to pay off some or all of your mortgage in the event of your death, in addition to some interest. There are, however, lots of factors to take into consideration before signing your name on yet another dotted line.
Mortgage life insurance is often not as cost effective as other life insurance. Slaw
, Canada’s online legal magazine, uses the following example:
Take an example of a male non-smoker, age 31, with a $250,000 mortgage. The average monthly premium for 10 years for life insurance from the Canadian Bar Insurance Association (CBIA) would be just over $23 per month. A major bank’s mortgage insurance for the same amount would cost just over $32 per month (40% more). In addition, at the end of 10 years the CBIA coverage would still be $250,000, while the mortgage insurance policy would have reduced by over $50,000 to reflect the current outstanding mortgage.
That last sentence is a very important point when it comes to mortgage life insurance: The longer you have the mortgage insurance policy, the less its worth because it is tied to your mortgage balance. In spite of the fact that it is worth less, the premiums that you pay to the lender remain the same.
When considering mortgage life insurance, you’ll have to consider the fact that you will still need to pay for more “just in case” coverage apart from the mortgage life insurance itself. Again, mortgage life insurance is tied to your mortgage balance and it only covers your mortgage. That is it. Other expenses that may need to be taken care of – including a funeral and/or burial, moving, schooling if you have children, or anything else that will fall into someone's lap when you die – are separate costs that have to be covered somehow. Yes, your mortgage is a big and important expense, but it is not your only expense. Both term and permanent life insurance are meant to replace your income, at least for a period of time, after death, while mortgage life insurance is just meant to cover your mortgage. Because your lender won’t give you a mortgage that’s more than a certain percent of your income, your coverage is going to be less than it could be if you were to get a separate life insurance policy.
Limitations of coverage
We don’t often think about the back end of insurance, but there is also a difference in the way that a vast majority of lenders underwrite the policie for mortgage life insurance. It sounds crazy, but with some mortgage life insurance policies, you can sign at the time you get your mortgage, pay the premiums for the life of your mortgage, and still be denied when it comes time to make a claim. This is because of something called post-claim underwriting, where your suitability for life insurance is only verified after a claim is made, Blair explains.
“A big difference is called post- and pre- underwriting," explains Brad Blair, a wealth advisor with Worldsource Financial Management. "So when you buy mortgage insurance at the bank it’s post-underwriting. This means that if someone was to die, at that point in time they investigate the claim to make sure that the person was insurable before they are willing to pay out. With life insurance, you can get pre-underwriting, which means that the insurance company is committing themselves to the insurance. You’re basically finding out if you’re insurable before the insurance is issued.”
Post-underwriting is almost always used with mortgage life insurance, although the underwriting method may depend on the size of the mortgage. Sometimes there may be limits to the amount of mortgage insurance that a company will give you; for example, if your mortgage exceeds the maximum limit on the mortgage insurance, then only that amount will be covered. If you’re under that limit, it will be paid off.
Like mortgage default insurance, mortgage life insurance pays the lender, not you. You cannot change the beneficiary on your mortgage life insurance policy. One way to think about it is that your lender is the sole beneficiary of your life insurance policy, as opposed to your partner, your child, or anyone else you could choose with other types of life insurance policies.
Like some term life insurance, there is a set expiration date to mortgage life insurance, although there isn’t the option to renew at the end of the term. An “Annual State of the Residential Mortgage Market in Canada
” report from 2013 notes that the actual contracted period of mortgages within 2010-2013 was just shy of 15 years. Depending on how old you are when you get your mortgage, you have to think about your ability to get life insurance at the time that you repay your mortgage, when you’re 15 years older. You will still need coverage for your other expenses, but it’ll be more expensive for you to get life insurance at that stage than it would’ve been if you had gotten it when you were younger. And if you forego life insurance at that stage, then you have to be absolutely sure that you have enough in your other savings accounts and investments to cover the needs of your partner and/or your dependents.
Another limitation to consider is that the people selling you the mortgage life insurance are mortgage specialists, not insurance agents. So while they may know the ins and outs of mortgage contracts, they probably don’t know the ins and outs of insurance as well, and if they don’t know these ins and outs then they won’t be able to explain them to you.
Benefits to mortgage life insurance
If you’re older or not in the best health, choosing mortgage life insurance could be a good bet for you. This is because the premiums aren’t based on your individual medical situation, so you wouldn’t pay the higher premiums associated with being in poor health or at an advanced age as you would with other types of life insurance. Then again, depending on the kind of underwriting that your mortgage life insurance employs, this may be a factor when it comes to making a claim.
Ultimately, mortgage life insurance is a convenient product. Blair wouldn’t use the world ‘popular’ to describe them, but he does say that they’re “an easy product to buy and also I think that people are also uneducated as to what they purchase.” You can get mortgage insurance at the same time as you get your mortgage, and not have to think any more about it. Like your mortgage default insurance premiums, the premiums for your mortgage life insurance can be added to your monthly mortgage payments. Some of Blair’s clients will have denied mortgage life insurance when it was offered, but Blair sometimes sees people who will have already gotten mortgage life insurance, and for the most part, he finds “cheaper and better alternatives for them.”
Even so, Blair says that mortgage life insurance would make sense for some people, in spite of its shortcomings. “I would always suggest that someone accept their mortgage insurance offer and then seek out alternatives. The reason for that is they may be considered insurable by the definitions of the mortgage insurance in its basic terms, but once they go for underwriting, something may get discovered, which may deny them insurance coverage. Some type of insurance is always better than none.”
Remember that you can cancel mortgage life insurance at any time, but you can’t get mortgage insurance later on in the life of your mortgage.
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