Do You Need Mortgage Protection Insurance?

February 24, 2015

Like most Canadians, the family home is a big part of your financial net worth. But, in the early days at least, a big mortgage means it’s often more of a liability than an asset.

That’s why most lenders encourage homebuyers to buy supplementary insurance from them — often labelled as mortgage balance protection — that is designed to pay off or reduce your mortgage balance in the event of death or critical illness.

While these plans are convenient, it’s important to realize that there are other options available when it comes to protecting your family in the event of your death.

In fact, while it sounds like a sensible and straightforward choice at the time, insuring your mortgage this way can be more expensive than buying insurance sold separately.

Who receives the benefits?

Typically, mortgage insurance pays off the loan’s outstanding balance — which is good for the lender, but creates little value for your family.

A more customized policy, on the other hand, would pay the benefit directly to your family members who can then decide if they want to pay off the mortgage debt in full or direct the funds towards more pressing financial needs.

Here’s another consideration: With mortgage insurance obtained through a bank, coverage decreases with each monthly payment — but the premiums don’t follow the same pattern. Nor is there any discount for non-smokers.

A steady level of protection

When you own life insurance directly, however, the level of protection remains fixed through out the term of the policy.

The mortgage market has become more competitive in recent years — and that’s a good thing. But if you change banks when your mortgage is up for renewal a few years later, keep in mind that you’ll have to reapply for coverage through the new lender.

This means submitting new medical evidence and paying rates based on your current age. What’s more, if your health status has changed significantly since you last took out your mortgage, your new lender may not want to insure you.

Limited shelf life a concern

Here’s another caveat: The mortgage insurance you buy through lenders usually terminates when the mortgage is paid off or when you reach a certain age, generally 70 years old. An individual policy can be held for as long as you want.

One option is a term life insurance policy where the monthly premiums are guaranteed for a fixed period of time — say, over the next decade.

If you purchase a 10-year term policy, then in 10 years you could negotiate a new policy to cover the balance of the mortgage. Those who don’t want to take the risk of being uninsurable in 10 years and perhaps having to pay a significantly larger premium on renewal might opt for a 20-year term.

If you go this route, however, expect to pay something like 25 to 30 per cent more in the early years for this protection.

Medical history a key factor

Because mortgage life insurance obtained through lenders is usually offered based on a brief questionnaire and not a medical, there’s also the risk of something known as post claim underwriting.

Rather than check your detailed medical history in advance, your lender will ask you a few questions and then decide whether or not you qualify for insurance.

This means that key medical issues are explored only after a person dies. As a result, a claim could potentially be denied because of issues not disclosed properly on the questionnaire.

Remember, you’re ultimately responsible for such disclosure. Dealing with an insurance advisor or broker means any necessary due diligence is usually performed up front. Thorough medical questions are asked and, in some instances, a nurse may even visit your home to perform a physical.

Don’t buy anything in haste. Be sure to shop around to ensure your family has the mortgage protection you planned for them.