Canadians owe $2.17 trillion in household debt, according to the Bank of Canada. More than 70% of that is residential mortgage debt. To protect these mortgages, homeowners have a couple of options. You can buy mortgage insurance from a financial institution. Or you can get mortgage protection with life insurance and critical illness insurance from an insurance company.
- Mortgage insurance works by paying off the outstanding principal balance of your mortgage, up to a certain amount, if you die.
- Mortgage protection, on the other hand, uses a combination of insurance policies to protect you:
Key differences between mortgage insurance and mortgage protection with life insurance and critical illness insurance
The main difference with mortgage insurance is that the payment goes to the lender. The amount you’re covered for declines as your mortgage balance declines. With mortgage protection, critical illness insurance gives you a one-time payment you can use for your mortgage or other expenses as you choose. And life insurance pays a tax-free amount to your chosen beneficiary (the person who receives the benefit) when you die. The payment can cover more than just the mortgage. The beneficiary may use the money for any purpose.
Beneficiary. With mortgage insurance, the money goes to the lender. With critical illness insurance, the money goes to you. With life insurance, it goes to whomever you name as 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’ll have to prove that your health is still good. You’ll also pay the mortgage interest rate the new mortgage provider offers. With life and critical illness insurance, you can take your policy with you if you transfer your mortgage to another company. There’s no need to re-apply or prove your health is good enough to be insured.
Flexibility. With mortgage insurance through a lender, your needs may change over time. But you don't have the flexibility to change your coverage. With mortgage protection, you can convert term life insurance and term critical illness insurance plans into permanent plans later on.
- When should you buy life insurance?
- Do you need critical illness insurance?
- What type of life insurance do you need?
Cost vs. coverage. With a lender-offered mortgage insurance plan, the benefit you’re paying for decreases as you pay down your mortgage, but your cost stays the same. If you pay off your mortgage, your coverage is gone. With life and critical illness insurance policies, the amount of coverage doesn’t decrease over time, even if you repay your mortgage.