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Understanding life insurance

May 09, 2019

Do you need mortgage insurance?

Your home is likely the biggest asset you’ll ever own. So how can you protect it in case something were to happen to you?

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:
    • Term life insurance covers you for a set period, such as 10, 15, 20 or 30 years. It can be suitable if you’re looking for low-cost insurance. While the premium may be low for the first term, the cost will increase when it’s time to renew. Buying coverage for a long enough term to match your mortgage term – 30 years, for example – will keep the cost steady. (Read more: Is term life insurance right for you?)
    • Permanent life insurance can be more expensive at first, but it covers you for life. The amount you pay can either be guaranteed to stay the same or vary over time, depending on the type of plan you choose. (Read more: Is permanent life insurance right for you?)
    • Critical illness insurance gives you a one-time payment if you are diagnosed with a serious illness that's covered under the policy (and you meet the other policy conditions). You can use the money for medical expenses, to pay off your mortgage or for anything else you wish – it’s up to you. (Find out how a serious illness could affect your finances. Try this Critical illness insurance calculator.

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.

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.

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