3 Reasons Why Mortgage Life Insurance Might Not Be a Good Fit For You
When you sign up for, or renew your mortgage your bank will encourage you to take out their loan protection insurance at the same time. The idea being that the mortgage life insurance will pay off the loan in the event that you were to die before the mortgage is paid off. According to Which Mortgage Canada this might not be your best option. Here’s why:
1) Mortgage Life Insurance is more expensive
In a direct cost comparison given the example of a 31 year old with a $250,000 mortgage SLAW (Canada’s Law magazine) found that the banks mortgage life insurance policy was 40% more expensive than an equivalent term life insurance policy. Also, after 10 years the life insurance policy still pays out $250,000, while the banks policy still costs the same but pays out $50,000 less (the balance of the mortgage).
2) The bank get’s the money not your loved ones
The banks mortgage life insurance is actually a loan protection policy designed to pay the bank what’s left of the mortgage. The insurance company pays the bank directly. With a term life insurance policy the insurance company pays your loved one and they can use the money how they choose.
3) Your mortgage may not get paid off after all
When you sign up for bank mortgage life insurance the form is very simple. It contains a few all encompassing questions about your health and little explanation. Whether you are covered or not is only decided after you die. The banks’ insurance company can legally refuse to pay out if they can prove something in your medical history (such as diabetes or high blood pressure) was inconsistent with the ticks on the form.
What is covered by Term life insurance is determined up front. Your medical history is taken into account and is included in the coverage.
So what are the advantages of mortgage life insurance?
If you buy your property with less than a 20% down payment mortgage life insurance is compulsory. You are covered by CMHC insurance. First time buyers benefit from government backed insurance by encouraging banks to lend more.
If you buy your property with >20% down payment, mortgage life insurance is likely not a good fit and the only advantage is the convenience of simply ticking a box while signing up for your mortgage. Bearing in mind the caveats mentioned above.