Do you have a mortgage?
If so, you may have heard of mortgage life insurance. Your lender sells it to you to pay off your mortgage in case you pass away.
But before signing up for this product, there are some things you need to consider.
Mortgage life insurance is not always the best option for you because it doesn’t offer as much protection as other types of life insurance policies do. You should consider other options like term insurance instead of going with what the bank offers without thinking about it first.
In this post, I will show you how term insurance gives you better coverage while saving you money at the same time.
- Key takeaways:
- Term life insurance is superior to mortgage life insurance in many ways.
- The proceeds of mortgage life insurance has to be used to pay off the mortgage. Your family cannot use the lump sum benefit for any other purpose.
- Because your lender owns the mortgage life insurance policy, you can't change things like the beneficiary and coverage amount.
- Mortgage life insurance typically costs more than an individual term life insurance policy.
Mortgage Statistics In Canada
Did you know that there is nearly $1.44 trillion in mortgage debt in Canada!?
And that there are 6.03 million homeowners with a mortgage out of a total of 9.8 million homeowners?
That means, on average, each homeowner has nearly $240,000 of mortgage debt.
It’s no wonder lenders want to protect their investment in case the borrower passes away prematurely.
Mortgage life insurance does exactly that. It places insurance on your life so that if you pass away during the mortgage term, the insurance company pays a death benefit to the lender. The death benefit is equal to the balance remaining on your mortgage.
To qualify, all you have to do is answer “no” to a few medical questions. This takes place while you’re signing the documents to finalize the mortgage. Then the premiums are embedded into your mortgage payments, and you’re covered.
So the process is streamlined, and you’re covered right away. Good deal for you, right?
Read on and find out why it’s not and why you should avoid mortgage life insurance at all costs.
15 Reasons Why You Should Avoid Mortgage Life Insurance
1. The beneficiary is always the lender. This means you have no choice on what to do with the proceeds from the death benefit. The lender will always use it to pay off the mortgage. You don’t have the flexibility of using the death benefit for other purposes like investing and paying final expenses.
2. The policy is not portable. When your mortgage is due for renewal, you want to shop around for the best rate and features. That means you might not want to keep it at the same bank.
But when you switch your mortgage over, your mortgage life insurance doesn’t move with it. So your coverage ends, and you’ll have to qualify again with the new lender. If you don’t qualify because of a medical condition, you’re left stranded without any coverage.
3. The policy is owned by the lender. They can decide to cancel the policy at any time with 30 days’ notice, leaving you without any protection. You can’t make any changes to the policy, like changing the beneficiary or decreasing the coverage.
4. The coverage decreases as you pay down the mortgage. Even though you’re paying the same premium, you receive less for your money as time goes on. Why pay a fixed amount for decreasing coverage?
5. Underwriting occurs after you make a claim. This is huge. Underwriting and determining your risk for a term policy is done upfront. The insurance company knows all about your health, medical history, and lifestyle. If you die, it will pay a claim without any further questions.
But with mortgage life insurance, underwriting is done post-claim. That means after you die, then there is a test to determine if you qualify for insurance. The insurance company will look through your life insurance application to find something that contradicts your medical history. If they do discover a misrepresentation, they have the right to deny the claim. That means you’re paying the premium, but your coverage isn’t even guaranteed. How is that fair?
Imagine the horror of a declined claim leaving your family in financial distress. Dying and no insurance payout? Talk about a double whammy.
6. The application is not completed by a licensed insurance agent. It’s like having surgery performed by someone other than a surgeon. Only a qualified life insurance agent knows the questions asked on the life insurance application form and can explain them adequately. Having an unlicensed bank representative ask you the questions increases the likelihood that the insurance company will find a fault on your application when they do the underwriting post-claim.
7. It expires when you pay off your mortgage. You might still need life insurance after you pay off your mortgage. If you still have young children, need to replace your income, or want to pay off your final expense, you’ll want insurance to cover these liabilities. But you don’t have the option of keeping mortgage life insurance after the mortgage is paid off.
8. It is more expensive. Right now, on BMO’s website, you can get a quote for mortgage life insurance for a 35-year-old male for $500,000 for $65/month. Comparatively, a term-25 policy costs $46.35/month. You save almost 30% with the term-25 policy. Over 25 years, that amounts to more than $5,000! Plus, the premium is guaranteed for 25 years, and the death benefit never decreases.
If you want the coverage to reduce so that it mimics the mortgage balance, there’s a type of term insurance called decreasing term. The death benefit falls every year until the end of the term, where it is 50% of the original amount. So if your initial coverage is $500,000, a term-25 decreasing term policy will drop to $250,000 in year 25. This type of policy costs $40.05/month for a 35-year-old male. You save almost 40% compared to mortgage life insurance!
Avoiding mortgage insurance is one of the easiest ways to save on life insurance!
9. The rates are not guaranteed. The lender may raise the rates at any time, unlike the contractually guaranteed premiums of term life insurance policies.
10. You can’t choose the amount of coverage. The amount of life insurance must equal the balance on the mortgage. If you want more coverage to cover final expenses, children’s education, and replace your income, you can’t tack on more of it on mortgage life insurance.
11. You can only qualify for standard rates. If you are in better health than the average person, you will be eligible for preferred rates for individual term policies, which may be up to 30% cheaper than standard rates. Preferred rates don’t exist for mortgage life insurance.
12. You can’t convert mortgage life insurance. You can convert a term policy into a whole life or universal life insurance policy without any evidence of good health. Both of these are permanent and last a lifetime.
Why would you want to do this? As you get older, your health may deteriorate, making it harder for you to qualify for insurance. But you might want some permanent insurance to cover final expenses or to execute estate planning strategies. Both of these are permanent needs that you can’t accomplished using term insurance. Having the conversion option with term insurance satisfies your need for some permanent coverage.
13. You can’t add riders. Life insurance riders are options that you can add to the policy to enhance the coverage. For example, you can add a rider to cover your spouse under the same policy. You can also add a rider that gives you the choice of increasing your coverage at a later date without going through underwriting. These riders are available on term products to tailor the policy specifically for you.
14. No choice in premium payments. The premium must be added to your mortgage payments. Term policies give you an option of monthly, quarterly, or annual payments, so you have more choice when the expense occurs. For example, you can pay for a term policy annually and time it so that the payment occurs when you get a tax refund or if you receive an annual bonus at work.
15. Impaired risks are declined. If you answer “yes” to any of the medical questions on the creditor’s insurance application, coverage is automatically denied – no additional underwriting takes place! With a term policy, you can get covered even if you’re at higher risk than average. You’ll end up paying more, but at least you’re covered.
You don’t need 15 reasons to avoid mortgage life insurance. 1 or 2 should be enough to turn you away from the product.
But when all the signs point to individual term insurance being better than mortgage life insurance, there is no reason you should walk out of the bank owning one of these policies.
If you’re not convinced, watch this Marketplace feature on CBC. It does a great job describing the experiences of people who faced problem #5 on my list.
Here’s a table that compares the term life insurance to mortgage life insurance.
| Term insurance | Mortgage life insurance | |
|---|---|---|
| Ownership | You are the owner | The lender is the owner |
| Beneficiary | You can choose the beneficiary | The lender is always the beneficiary |
| Portability | Because you own the policy, you can keep it no matter who your mortgage is with | Once you switch lenders, you’ll have to qualify for coverage again |
| Death benefit | Level over the life of the policy | Decreases as the mortgage is paid off |
| Underwriting | Occurs at the time of application so your coverage is guaranteed | Post-claim underwriting means the lender can review your application after your death to determine if you qualify for coverage |
| Licensed agent | Yes, only licensed life insurance agents can sell term insurance | No, it is not mandatory for bank representatives to meet licensing or education requirements |
| Expiry | Expires at the end of your chosen term, or sooner should you want to cancel it | Expires when the mortgage is paid off without an option to keep it for a longer period |
| Cost | Less expensive | More expensive |
| Guaranteed rates | Yes, the premium is guaranteed for the duration of the policy | No, the lender can raise the premium at any time |
| Amount of coverage | You can choose how much coverage to buy | The coverage must equal the mortgage balance |
| Preferred rates | If you are healthy, you can qualify for preferred rates | Preferred rates aren’t available |
| Conversion | You can convert a term policy into permanent insurance | Not convertible |
| Riders | You can add riders to customize your policy | Riders aren’t available |
| Payment frequency | You can choose how often payments occur | The premium is embedded into the mortgage payment |
| Impaired risks | You can still qualify for insurance but likely at a higher rate | You are declined coverage |
So there you have it – 15 reasons why you should avoid mortgage life insurance.
Now I’d like to hear from you:
Which one of the reasons from this post is a dealbreaker for you?
Or was there another reason that I left out?
Let me know in the comments below.
Note: Not all mortgage life insurance is created the same. Some of the disadvantages mentioned in this post may not apply to some types of mortgage life insurance. Doing your due diligence is crucial when deciding whether to buy mortgage life insurance or term insurance.
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And forget the return of premium rider. It”s just another load to raise the price. The insurance company holds your money wlithout paying you any interest.
The riders mentioned in the post are the most common ones. Return of premium riders are usually for critical illness and disability insurance policies.
That’s because people look at it wrong.
You’re thinking about “buying insurance or saving my money”
Remember, when you have a return of premiums rider, you get the money for the rider + the money for the premiums.
So for example:
Policy: $100/mo
Policy w/ return of premiums: $150/mo
You are ALREADY spending the $100/mo. For extra $50/mo you’re getting the $50 + $100 back for every month.
It’s actually superior than any other guaranteed investment.
Thanks for your reply Pedro. To play devil’s advocate, using critical illness insurance as an example, suppose you suffer a heart attack and make a claim. You would have paid $50/mo more with the second policy and received the exact same benefit as with the first policy.
There are arguments for and against the rider and your decision will depend on many factors, like your cash flow, risk tolerance, etc. It’s too simplistic to say that everybody should or shouldn’t get the rider. It will vary case by case.