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Insuring your life

January 25, 2016

Do you need mortgage insurance?

Your home is likely the biggest asset you’ll ever own. So how should you ensure your home is protected should something happen to you?

Canadians held $855 billion in mortgages on their principal residences in 2011, according to the Canadian Association of Accredited Mortgage Professionals, and the Statistics Canada Survey of Household Spending reports 57% of Canadian homeowners have a mortgage. To protect these mortgages, homeowners have options: mortgage insurance provided by a financial institution, or mortgage protection using life insurance and critical illness insurance provided by an insurance company.

  • Mortgage insurance works by paying off the outstanding principal balance of your mortgage should you die, have an accident or suffer a terminal illness, up to a specified maximum amount.
  • Mortgage protection, on the other hand, uses a combination of insurance policies to protect you:
    • Term life insurance covers you for a set period of time — such as 10, 15, 20 or 30 years — and can be suitable for homeowners looking for low-cost insurance. While the premium may be low for the initial term, the cost will increase when the time comes to renew.
    • Permanent life insurance can be more expensive initially, but provides coverage for life. Premiums can either be guaranteed or variable, depending on the type of plan you choose.
    • Critical illness insurance provides you with a lump-sum payment you can use for medical expenses or to pay off your mortgage should you be diagnosed with a serious illness that's covered under the policy (and you meet the other policy conditions) — how you use the benefit is up to you.

Key differences between mortgage insurance and mortgage protection using life insurance and critical illness insurance

The main difference between mortgage insurance and mortgage protection using life insurance and critical illness insurance is that mortgage insurance pays the lender, and the coverage declines as your mortgage balance declines. On the other hand, critical illness insurance pays you a lump sum that can be used to pay your mortgage or other expenses as you choose. Life insurance pays a tax-free benefit to your chosen beneficiary when you die. The payment can cover more than just the mortgage, as the beneficiary may use the proceeds of the policy in any way you need to.

Beneficiary: In the case of mortgage insurance, the lender is the beneficiary. While with critical illness insurance, you're the beneficiary and with life insurance, you can name the beneficiary.

Portability: If you change mortgage providers, your mortgage insurance doesn't automatically move with you. If you move your mortgage to another lender, you will be required to submit evidence relating to your health, and will be subject to the current rate of the new mortgage provider. With life and critical illness insurance, you can take your policy with you if you transfer your mortgage to another company, with no need to re-apply or prove insurability.

Flexibility: With mortgage insurance through a lender, your needs may change over time, but you don't have the flexibility to change your coverage. Term life insurance and term critical illness insurance plans can be converted into permanent plans at a later date.

Cost vs. coverage: With a lender-offered mortgage insurance plan, the benefit decreases as you pay down your mortgage, but the premiums remain the same. If you pay off your mortgage, you lose all your coverage. With life and critical illness insurance policies, the amount of coverage does not decrease over time (even if you repay your mortgage).

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