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Why Mortgage Life Insurance May Not Be the Best Idea

It is part of the quintessential Canadian dream to own one’s home – no easy feat in the nation’s most competitive regions, such as the  Vancouver real estate or Toronto real estate markets.

Once the bidding wars are won, though, and the deal is signed, comes the really hard part – ensuring you’re properly protecting your largest-ever financial investment.

At a minimum, this means taking out an insurance policy to protect the home’s structure and contents from damage or theft, as well as general homeowner’s liability. In fact, having home insurance is often a requirement that must be satisfied before a lender will grant a borrower a mortgage.

It’s equally important, once that mortgage is in place, to protect your ability to pay it. Should an unforeseen death, illness, or job loss occur, you’ll want peace of mind knowing you or your loved ones aren’t at risk of losing your home. One such solution – which will be presented to you by your lender – is to take out mortgage life insurance as an add-on to your home financing.

What is Mortgage Life Insurance?

At face value, this can seem like a smart move. Your lender will also ensure it’s a convenient one, often writing your participation directly into the mortgage agreement for you to opt out of. Your premiums will be made directly to the bank, and, in many instances, riders for severe illness or disability can be added to your coverage.

But not so fast.

The truth is that mortgage life insurance is less flexible than a traditional life insurance policy and depending on the financial situation of you and your loved ones, may not be an ideal fit.

Here’s what homeowners should be aware of before opting into the coverage:

  • The bank is the one who benefits: Unlike traditional life insurance, where the policyholder appoints a beneficiary of their choice, any death benefit from a mortgage life insurance policy goes only to the lender.  
  • The payout can only be used to cover mortgage payments: No part of it may be used for ongoing financial income support for your loved ones, or any resulting health services you may require such as live-in care or rehabilitation costs.
  • You’ll receive less over time: Because your mortgage principal amount shrinks over the course of your amortization, so too does the cash payout required to cover its payments. Your premiums, however, will remain the same.
  • You may not qualify: Often, lenders won’t run the approval process for a mortgage life policy until it’s needed – and if there’s a red flag on your application, you could find yourself ineligible for coverage. Premiums paid into the policy will be returned at this point, but you or your loved ones will be left without a death or disability benefit.

Why Borrowers Should Take Out Their Own Life Insurance Policy

Those who want more control over how their death or disability benefit is paid out are wise to explore their own life or disability insurance options (either through their own research or a trusted resource), and ensuring their policy is adequate to cover their mortgage payments if they suddenly became unable to do so. With a traditional policy, the beneficiary will receive the death benefit directly to use at their discretion, whether that’s covering housing costs, supplementing income, or ongoing care.

As well, traditional life insurance can be adjusted over time to best suit the policyholder’s needs. A great method is to take out a term life policy and decrease your coverage over time as you pay off your mortgage, thereby saving money on premiums.

That’s why, when it comes to your mortgage and insurance options, it’s wise to do your research before signing on the dotted line and make sure it’s the best financial fit.

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