What is mortgage insurance?
Mortgage insurance is typically offered by a mortgage lender. The coverage pays off your mortgage debt if something happens to you if your mortgage is still outstanding. Your home is often your most valuable asset, both financially and emotionally, and it’s important it is protected should something unfortunate happen to you. Term life insurance is often a more flexible and cost-effective way to cover your mortgage debt.
In Canada, mortgage insurance is a protection product, typically offered by your mortgage lender. In the unfortunate event of your death with your mortgage loan still outstanding, this insurance will pay off the debt of your mortgage loan. It is also referred to as mortgage life insurance.
For example, let’s say you are purchasing a house for $100,000.
You put together a 15 percent down payment, and the amortization period is 25 years. That leaves an $85,000 mortgage loan that you need to pay off over the next 25 years (ignoring other variables which come with homeownership).
If something happens to you within this 25-year period, your lender still expects to be paid back that mortgage loan. To do this, your family, loved ones, or your estate are expected to come up with that cash by dipping into their savings or selling the property to settle the mortgage loan.
Conventional mortgage life insurance ensures that the mortgage loan is paid off in these circumstances; some policies can even cover the mortgage loan in case of a disability or a serious illness.
It should not be confused with mortgage default insurance or mortgage loan insurance.
What is mortgage default insurance?
If your initial down payment for your mortgage is less than 20 per cent of your purchase price, and your potential home price is below $1-million (the maximum allowed price to qualify for default insurance), you are required to purchase mortgage default insurance (also known as mortgage loan insurance). Mortgage default insurance is offered by providers such as the Canada Mortgage and Housing Corporation (CMHC), a crown corporation or private mortgage insurers like Genworth Financial Canada and Canada Guaranty.
CMHC insurance pays out the lender if the borrower (in this case you) defaults on their payments for whatever reason (not just death) – there is no payout to you, and the CMHC can later come after you or your estate for these costs, as you are still liable for them.
It enables banks and lenders to offer mortgages and lower interest rates to first-time home buyers. It protects the lender in case these borrowers default and it lets a larger number of people become homeowners.
To learn more about how mortgage default insurance works and how much it costs when your downpayment is less than 20 percent, head to our CMHC Mortgage Default Insurance Calculator.
Is lender-provided mortgage insurance mandatory?
No, mortgage insurance is not mandatory. But you might have noticed your lender making it seem like it.
Can I cancel mortgage insurance?
Yes, you can cancel mortgage insurance. However, like with all insurance, we suggest you don’t cancel it unless you have alternative coverage available and ready to replace it.
Can I use life insurance to replace mortgage insurance?
Yes, term life insurance can provide the same security as traditional mortgage insurance plus all the benefits you rightfully assumed would come with it but are now seeing is not the case.
How does protecting a mortgage with life insurance work?
Protecting a mortgage with life insurance works by obtaining term life insurance that is in force throughout the amortization period of your mortgage.
Instead of a diminishing payout linked to your remaining mortgage balance, your beneficiaries are entitled to a tax-free, lump-sum payment which never reduces and can be applied to whatever they choose through mortgage protection insurance.
Private mortgage insurance, as it is sometimes called, offers the same security throughout the riskiest years of your mortgage loan, with several additional benefits not offered by lender-provided mortgage life insurance.
You can get coverage well beyond the amount of your mortgage loan (more on that later). You also get to pick your own beneficiary, instead of paying for insurance to protect the lender.
Where do I get mortgage insurance?
You can only get mortgage insurance from the lender who provided your mortgage loan. With 73 percent of mortgages coming from Canada’s Big 5, it mostly ends up being your bank or financial institution.
However, term insurance is available from several companies nationwide, and we happen to know a simple, quick way to check out the best quotes and find the best insurance company for you.
How do I pay for mortgage insurance?
You pay your mortgage insurance alongside your mortgage payments, with the lender-provided option,. Term life insurance can similarly be paid monthly, with an added flexibility of paying for it yearly.
How much mortgage insurance do I need?
How much mortgage insurance you need depends on the value and cost of your home and several other facts. Unfortunately, you don’t get much of a choice if you go through your lender – the insured amount is tied to the value and term of your mortgage loan. However, mortgage protection through term insurance lets you expand the coverage for other needs (such as child care, education needs, your family’s future living expenses, funeral expenses and more).
Why is mortgage insurance expensive?
Lender-provided mortgage insurance is so expensive because the price is inflated to account for no underwriting – the process an insurance company goes through to determine the appropriate fees for taking on the financial risk of your death.
Without this stringent evaluation process, they are taking on the risk of your policy paying out, you suing them in the rare case it doesn’t, and paying percentages and finders fees to whatever other parties were involved in selling you the policy.
Why is life insurance cheaper than mortgage insurance?
Term life insurance is cheaper than mortgage insurance because it goes through full underwriting. The potential payout is bigger and more consistent, so an insurance company makes sure you are as insurable as possible. If insuring you is less risky, then they pass some of those savings on.
Is mortgage insurance guaranteed?
No, mortgage insurance is not guaranteed. With lender-provided mortgage insurance, the claim is evaluated at your death to see if there is any reason why it should not be paid out. For instance, if you had a health condition at the time of getting the mortgage insurance and it was not disclosed, your claim can and most likely will, be denied.
Not only does that mean a lack of security, but an added stress on your loved ones and estate should they have to fight for a claim they feel is rightfully theirs.
Term life insurance in most cases is guaranteed coverage, which means a much higher probability of your claim being paid without any hassle.
What happens to my mortgage insurance if I sell my house?
If you sell your house, your lender-provided mortgage insurance is tied to the lender. Thus when you sell your house, switch mortgage providers, or anything else that ends your relationship with that particular debt, the corresponding mortgage insurance policy is cancelled.
Term insurance offers consistent protection throughout your housing situation. The agreement is independent of your property.
Does my beneficiary have to spend the money on the mortgage?
With the lender-provided option, you don’t have any say in the matter. Once the policy is activated, all transactions are handled by the suits at the bank or lender’s office until they deliver a deed to your family or estate.
Term life insurance instead gives your beneficiary the freedom to do what they want with the payout. They may want to pay off the mortgage or use the funds on other needs at that time. Ultimately, you are leaving them the choice.
I don’t want to read any of this, just show me a checklist that sums everything up!
Term life insurance vs. Mortgage Insurance – which is better?
So what do I choose between mortgage insurance and mortgage protection?
We laid out a pretty good case for why we believe mortgage protection through term life insurance is the right choice for Canadian homeowners.
Armed with the above knowledge and our insurance calculator, you’re able to make the right decision for you, your family, and your home.