Written by Dave Stewart
Zehr Insurance Brokers Ltd.
Picture this… You’re sitting at the bank with mixed emotions, excited about becoming a homeowner, but perhaps a little anxious about the mountain of paperwork in front of you. You’ve just purchased your first home and signed what seems like an endless stack of documents to set up your mortgage. Then you look at the figure you now owe. It’s a big number.
That’s when the banker asks, “Would you like to add mortgage insurance?” They explain that if you were to die, the insurance would pay off your outstanding mortgage. After all, you’ve just made one of the biggest purchases of your life, so protecting it seems like a no-brainer. You agree.
This is a situation many Canadians find themselves in.
And while mortgage insurance offered through your lending institution is certainly better than having no coverage at all, there is another option that is much more flexible and often less expensive: Term Life Insurance.
To fully understand which product may be better suited to your needs, it’s important to understand the basic purpose of each.
Mortgage insurance is designed primarily to pay off your outstanding mortgage balance if you pass away. The insurance benefit is paid directly to your lender.
Term life insurance is designed to financially protect your family in the event of your passing. The benefit can be used for your mortgage, income replacement, final expenses, a child’s education or other financial needs. The benefit is paid to a beneficiary of your choosing.
Put simply, mortgage insurance is designed to protect the mortgage, while term life insurance provides a broader financial benefit to your family.
And the differences don’t stop there.
Mortgage Insurance vs. Term Life Insurance
| Mortgage Insurance with a Bank | Term Life Insurance |
Policy ownership | Bank owns the policy | You own the policy |
Insurance Payout | Decreases over time as your mortgage balance decreases | Stays the same |
Your cost | Increases over time when your mortgage renews | Stays the same |
When underwritten | At the time of a claim | At the time of application |
Beneficiary | Bank | Your family |
Let’s break down a few of these comparisons.
Policy Ownership
With mortgage insurance, the bank is the policy owner and beneficiary. This means the coverage is tied to your mortgage. If you switch lenders in the future to secure a more competitive mortgage, your existing mortgage insurance does not transfer to the new financial institution. You will need to apply for new coverage at your current age.
Compare this with Term Life Insurance, where you own the policy. If you switch mortgage lenders in the future, your life insurance policy remains in force and is unaffected by the change. As the policy owner, you also have greater flexibility to make changes as your needs evolve. Depending on the policy, this could include changing beneficiaries, adding certain coverage or converting the policy to permanent life insurance.
Insurance Cost and Cost
Mortgage insurance is connected to your mortgage. As you pay down your mortgage, the amount of insurance required to pay off that mortgage decreases. Also, the cost changes over time. When you renew your mortgage, the bank rates you on your age currently, meaning the price is more. In other words, you are more money for less coverage over time.
Term life insurance works differently. With a level term life insurance policy, both the insurance benefit and premium remain level for the selected term. For example, suppose you purchase a 20-year term life insurance policy with $500,000 payout for $50 per month. If you were to pass away in year two, your beneficiary would receive the $500,000 death benefit. If you were to pass away in year 19, the benefit would still be $500,000. Your $50 monthly premium would also remain unchanged during the 20-year term.
Simply put, with mortgage insurance you are paying more money for less coverage over time… Term life insurance is level payments and level payout for the duration of the policy.
When Is the Policy Underwritten
One of the most important differences to understand is when underwriting takes place. “Underwriting” is an insurance term that essentially means assessing the risk of insuring you and determining whether the insurer will accept that risk and on what terms. With many mortgage insurance products, the underwriting process is largely completed when a claim is made. If you pass away and a claim is submitted, the insurer may review the information provided when you applied, along with your medical and other relevant history, before determining whether the claim will be paid.
With term life insurance, underwriting takes place when you apply for the coverage. Your health, lifestyle and other relevant factors are assessed before the policy is issued. That difference can be significant.
How Much Life Insurance Do You Need?
Another important consideration is that your family’s financial needs don’t disappear when the mortgage is paid off. If you pass away prematurely, your family may face many expenses beyond the outstanding mortgage balance. There may be property taxes, monthly household bills, children’s education costs, medical expenses and funeral costs. And perhaps most importantly, your family has lost your income.
Mortgage insurance is designed to address the mortgage debt. Term life insurance can provide your family with a broader financial safety net.
With term life insurance, you decide how much coverage you want based on your circumstances, financial obligations and budget. There isn’t one universal amount that is right for everyone but as a basic starting point, one commonly used calculation is:
- All combined debt
- + $100,000 per dependent child
- + a minimum of two years of gross salary
For example, consider a person with:
- $500,000 in combined debt
- Two young children
- $75,000 annual income
Using the above calculation:
$500,000 + $200,000 + $150,000 = $850,000
This would suggest approximately $850,000 of term life insurance coverage as a starting point for consideration.
Of course, everyone’s situation is different. Your mortgage, income, savings, existing insurance, number of dependents and long-term financial goals should all be considered when determining the appropriate amount of coverage.
If you’d like to explore your life insurance options, contact me, Dave Stewart, a senior member of the life insurance team at Zehr Insurance.
