When I bought my first home with my now ex-boyfriend we got a huge mid six figure mortgage. I was wondering… do I need mortgage insurance?
The mortgage broker at the bank highly encouraged us to sign up for mortgage insurance when we got our loan. Not knowing any better in our 20’s, and making hasty decisions on the spot, we ended up getting mortgage insurance.
We finalized our mortgage with mortgage protection insurance before thinking more in depth about other options (or even knowing about other options) such as term life insurance. We were attracted to the ‘no medical’ part of the mortgage protection insurance since my partner at the time smoked.
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Prior to signing the deal on the huge mortgage, I remember worrying at night not being able to sleep, and thinking:
Do I need mortgage protection and life insurance?
What if something happened to my boyfriend and he couldn’t pay the mortgage?
We need both our incomes to pay the mortgage…so how are we going to manage if something goes wrong?
Table of Contents
What is Mortgage Insurance?
Mortgage insurance should technically be known as mortgage protection insurance. Mortgage insurance sometimes gets confused with mortgage loan insurance which is related to CMHC (Canada Mortgage Housing Corporation) charging an insurance if you take out a mortgage for less than 20% of the purchase value of the home.
Basically mortgage loan insurance protects the bank if you default on your loan. So they are unrelated but I guess both are often called mortgage insurance so it is quite confusing.
Mortgage protection insurance helps you cover your mortgage payments if you become very sick and unable to pay your mortgage (e.g. work) or if you die unexpectedly.
Mortgage insurance has nothing to do with home insurance or anything like that.
The beneficiary of mortgage protection is actually the mortgage lender. You can apply for mortgage protection through the mortgage lender. In this case for me, it was a big bank, through RBC called Home Protector Insurance.
There are other banks that provide mortgage insurance too, like mortgage insurance from CIBC, Scotiabank, Manulife, TD, and BMO.
As you continue paying off your mortgage, the potential payout of your mortgage protection insurance actually gets lower.
Also, if you die, the money that you have been paying just goes towards the mortgage, and nothing else. Not your funeral expenses, not for groceries, not for utilities etc.
The purpose of mortgage insurance is to ensure that your mortgage is covered (and paid off) in the event if your death.
What is Term Life Insurance?
Term life insurance, on the other hand, means that you pay a fixed cost or insurance premium for a fixed duration of time and you get a fixed cash payout in the event of your death.
The insurance premiums are fixed. For example, if you choose to have a 30 year term life insurance, you pay the same amount of premium for thirty years.
The terms in term life insurance are usually something like, 5, 10, 20, or 30 years.
If you die within the 30 year term for example, your beneficiaries will receive a cash benefit. The cash benefit is predetermined and is defined on your insurance policy.
However, if you don’t die within the 30 year term and the life insurance policy expires after 30 years, then there is no cash benefit (or death benefit) paid out.
The cash benefit that is paid out in the event of death from a term life insurance policy can be used however your beneficiaries decide to use it- for example, it can be used towards paying off the mortgage, paying off other debt, paying money towards monthly expenses like utilities, or tuition, for example.
The other life insurance available is permanent life insurance, but that’s not typically as economical as term life insurance.
Mortgage Insurance vs Term Life Insurance
To make things a bit more clear about the differences between mortgage insurance vs term life insurance, here’s a visual comparison of mortgage insurance and term life insurance.
|Mortgage Insurance||Term Life Insurance|
|Beneficiary||The mortgage lender (they get the money)||Your dependents|
|Coverage Amount||Decreases as you keep paying||Stays the same|
|If you Switch Mortgage Lenders||You will have to reapply for mortgage protection insurance from the new lender||Nothing happens you are still covered|
|Payout Is||Just paying off mortgage balance||Cash so your dependents can decide how they need to spend the money|
|Who Sells It||Your mortgage lender||A life insurance broker|
|Medical Exams||Usually no medical exams required but in some cases there are||Typically there are medical exams depending on your age/ health|
|Life insurance premium is based on||Your age and the value of your mortgage on the date of application||Is based on your age, your gender, your health, the policy amount|
Why Term Life Insurance is Better
As you can see from the chart above, term life insurance is better because it has more flexibility and benefits the people important to you (because that’s what life insurance is all about).
Also, with term life insurance, you set the term and it is only renewed when the term is over, therefore you pay the same amount regularly until term is over and don’t have to risk paying a higher premium during the term.
With mortgage insurance, you have to renew your mortgage protection insurance every time you renew the mortgage. So, if you have to renew every five years, you may end up paying more in premiums since you will be older. Life insurance is less costly when you are younger.
Also, with RBC’s Home Protector Insurance there was a maximum dollar amount that was insured, and that was $750,000. If people have million dollar mortgages (and I know a few friends in Vancouver who do), then at least $250,000 would be left uninsured in the event of death. In this case, term life insurance would make much more sense, with at least a $1,000,000 life insurance policy.
In summary, term life insurance is better than mortgage insurance because:
- The payout benefits your beneficiary
- It is portable (so if you move or port your mortgage you are still covered)
- The payout doesn’t go down as you keep paying your premium
- Your beneficiary can decide what they want to do with the money and it’s not just limited to paying off the mortgage
Next Time You Get a Mortgage, Decline The Mortgage Insurance
What insurance do you need with a mortgage? Well, you know it should not be mortgage insurance.
If you already have good life insurance policy and you are getting a mortgage and the mortgage broker asks you if you want mortgage insurance, politely decline.
If you don’t have a life insurance policy and are getting a mortgage and the mortgage broker asks you if you want mortgage insurance, politely decline and look around for a term life insurance policy.
I became wiser and less hasty after signing up for mortgage protection insurance the first time. When I bought my own place a few years later (after the inevitable demise of that relationship), I ended up declining mortgage insurance even though I got a new mortgage.
Since my mortgage balance was lower than my total net worth and I had no dependents and was single, I declined mortgage insurance.
Term Life Insurance Buying Options
There are a number of places you can get term life insurance. You can contact a life insurance broker (usually friends and family contacts yield at least one life insurance broker that someone knows or can refer to).
If you’re in a hurry to finalize your home purchase and need life insurance in a pinch but need to avoid in-person contact because of COVID-19, there are options for life insurance.
- You can go an online life insurance company (like Manulife or PolicyMe)
- You can go through an independent life insurance agent (for example, friends and family referral)
PolicyMe provides term life insurance through by Canadian Premier Life Insurance Company, one of Canada’s most reputable life insurance companies.
PolicyMe’s policies can be 10-20% cheaper than other Canadian life insurance providers. Here’s my review of PolicyMe.
PolicyMe has a life insurance calculator (it’s free to use and you don’t have to share your email to receive the answer) to see how much term life insurance you would need.
Hopefully this helps you answer your question of “Do I need mortgage insurance”. The answer is usually no, and you should get term life insurance instead.
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Have you ever gotten mortgage insurance?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.