Don’t buy mortgage life insurance until you read this post!
Before I get into details, let’s set the stage with a video from CBC Marketplace on the subject of Mortgage life insurance. I recently spoke to the agent in this video and he assured me that the content and concerns in the video are as relevant today as they ever were.
Here’s a comparison of attributes of term life insurance and mortgage life insurance:
|Attribute||Term Life Insurance||Mortgage Life Insurance|
|Underwriting||Fully underwritten at time of application||Post-claim underwriting|
|Premium structure||Level for term (10, 20 or 30 years commonly)||Level for the term of your mortgage (likely 5 years)|
|Conversion||Yes, exchange for a permanent life insurance policy if you become uninsurable.||No. If you become uninsurable there are no exchange optoins.|
|Coverage structure||Level.||Declines with your mortgage balance.|
|Beneficiary||You choose, often naming spouse or other family.||Your favourite bank.|
Why do you care about these attributes?
- Underwriting. This can increase your probability of having a claim denied. With mortgage life insurance they do post-claim underwriting; they don’t look at your information until you make a claim. If there’s something they don’t like that could result in a claim denial they won’t find it until your beneficiaries make a claim. This is detailed in the above video.
- Premium Structure. You want your premiums guaranteed and fixed. With mortgage life insurance your premiums are tied to the length of your mortgage. When your mortgage renews, if you move to a different bank then your premiums will increase. With a term life insurance policy, premiums are fixed and guaranteed level for the ‘term’, which could be 10, 20 or even 30 years.
- Conversion. This is a huge risk with mortgage insurance, and one rarely talked about. If you become uninsurable under a mortgage life insurance policy and then switch banks you won’t be getting new insurance – you’re over and done.Most term life insurance policies offer (for free) a conversion option that lets you exchange your term policy for a lifetime coverage without a medical exam. If you become uninsurable with a term policy, just fill out a conversion form, no medicals, and you’ll have coverage for the rest of your life, at rates determined primarily by your health class from back when you first bought the term policy.
- Coverage structure. You probably want level coverage. But mortgage life insurance has coverage tied to your mortgage. As you pay off your mortgage your coverage goes down by the same amount. Yet your premiums remain the same. A term life insurance policy has coverage that is level as long as you keep the policy in force.
- Beneficiary. Yes your mortgage is paid off with mortgage life insurance – the proceeds are paid to the bank and wipes out your mortgage. But what if your beneficiaries don’t want to pay off the mortgage? What if they want some of that money for education, debt, some time off work, or anything else life related? A term life insurance policy pays the beneficiary of your choosing, with no conditions on the funds. They can decide afterwards if they want to pay off the mortgage, or continue to make monthly payments, or sell the house, or none of the above.
Mortgage life insurance simply has too many flaws and drawbacks, without any corresponding advantages. If you’re looking to insure your mortgage, look at an individual term life insurance policy instead.