Written by David Stewart
CAIB, CIP, Business Development & Marketing Manager
Introduction
In 2024, many Canadians are feeling the financial strains of high interest rates, inflated food prices and soaring gas prices. Looking to cut costs or be conscious of ways to save money to survive is imperative in today’s world.
If you are a homeowner with a mortgage, then you may have purchased mortgage life insurance from your lender when you signed up for your mortgage. It made sense at the time… if you pass away, then your mortgage is paid off. With this likely the biggest purchase of your life you didn’t think twice.
However, there is a much more cost-effective way to do this while also giving you more coverage; essentially protecting your family in the event of a premature death instead of the bank protecting their own interests: TERM LIFE INSURANCE.
Understanding the Hidden Costs of Mortgage Life Insurance
When I talk with clients, one shocking thing I find out is that not only are some people unsure if they even have mortgage life insurance with their lender, but they also have no idea what the cost is. This is because typically a lender will add the mortgage life insurance premiums with your mortgage and interest for a monthly or bi-weekly payment.
If you were to break down what this monthly or biweekly payment entails, many people find it distressing as to how much they are actually paying for their mortgage life insurance.
Cost is one thing, but when you stack up what you get with mortgage life insurance policy compared to a term life insurance policy, many people are more appalled…
To fully grasp what product is best suited to meet your needs- you need to understand the basic end goal between the two products:
Mortgage Life Insurance
Designed to pay off the remaining balance in the event of you or your spouse passing away while having a mortgage. The benefit is paid directly to the bank or lender.
Term Life Insurance
Designed to pay directly to whoever is named as the beneficiary. The benefit can be used however the beneficiary wants… pay off or pay down the mortgage, supplement (the now) lost income, put towards child’s education, etc.
Comparisons
So essentially, Mortgage Life Insurance protects the bank and Term Life Insurance protects your family. The differences don’t stop there… consider the following comparisons:
| Mortgage Life Insurance with Bank/Lender | Term Life Insurance with Life Insurance Company | |
| Policy ownership | Bank Owns | Insured Owns |
| Insurance Payout | Decreasing with Mortgage Balance | Level- stays the same |
| Cost/Premium | Increases when mortgage renews every 3-5 years | Level- stays the same |
| Underwritten | At time of Death | At time of application |
| Beneficiary | Bank | Insured’s Choice |
| Use of Funds | Mortgage only | Anything |
Further Analysis
Let’s breakdown a few of these comparisons for further analysis:
“Policy Ownership”
With mortgage life insurance the bank is the owner of the policy, meaning that you have no rights or options to amend the policy. Also, if you switch banks in the future to secure a more competitive mortgage, you start from scratch with a new mortgage life insurance policy as it is not transferable to another financial institution. In this situation of switching lenders to get a more competitive mortgage, the premiums/cost for your new mortgage life insurance policy will be more expensive as your rates are now based on your current age.
Comparing this with Term Life Insurance, you own the policy. This means that regardless of whether you switch lenders in the future your policy remains in force and unchanged. Also, as the owner of the policy you can also amend it in the future to suit your needs, for example you can change beneficiaries, add children to it or convert it to a permanent life insurance policy.
“Insurance Benefit” and “Cost/Premium”
Since Mortgage Life Insurance is tied to your mortgage, as you pay down the mortgage balance the mortgage life insurance benefit also reduces. Also, every time your mortgage renews, typically every 3-5 years, the cost/premium of your mortgage insurance policy increases as it is based on current age. Therefore, you are paying more money for less coverage over the course of time… makes no sense!
Term Life Insurance has a level Insurance Benefit as well as level cost/premium. Consider the following example if you had a 20 year term life insurance policy for $500,000 and the cost was $50/month. Regardless if you passed away in year 2 or year 19, your beneficiary would receive $500,000. Also, the cost of $50/month would not change until year 20 and at this point, as the owner of the policy you would have options. You could choose to renew the policy, convert it to permanent life insurance or reduce the $500,000 payout.
When policy is “Underwritten”
Most importantly is considering when the policy is “Underwritten”. Underwriting is an insurance buzzword but basically means reviewing the risk and agreeing to accept the risk.
With a Mortgage Life Insurance policy, underwriting commences at the time of a claim. This means that when you pass away the mortgage insurance company will review your application and health history to decide if the payment will be made.
With Term Life Insurance, underwriting is applied at the time of application or at the beginning. This means the risk of insuring your life is assessed and completed up front before premiums are paid. No surprises or delays when you pass away… This is a massive difference!
Conclusion
Summarizing these comparisons, it becomes quite clear that Term Life Insurance is a far superior product than Mortgage Life Insurance.
One thing that some people fail to recognize is that if they pass away prematurely there are far more expenses and financial burdens left on their family than just their outstanding mortgage balance. Even if mortgage life insurance were to pay out, the family still must pay property taxes, monthly bills, children’s education, incurred medical expense and a funeral, not to mention their monthly cash flow has taken a huge hit with the loss of an income!
With Term Life Insurance you decide how much coverage you want. There is no right or wrong answer to how much term life insurance one would require; but it must be a figure that gives you peace of mind but also fits your budget. A basic calculation of how much Term Life Insurance I recommend is the following:
- All combined debt + $100,000 per dependent child + min of 2 years gross salary
- For example, a person with $500,000 in debt with 2 young kids making $75,000 per year should have approximately $850,000 worth of Term Life Insurance
Life insurance is an important tool in your overall financial plan. Make sure you get the proper policy that protects your family and not your bank! Contact me for more information.
Dave Stewart
[email protected]
1-800-667-1802 ext 240
Call Zehr Insurance brokers and see if we can help you with your insurance needs.
