If you are taking out your first mortgage or renewing it, you may be encouraged to take out mortgage life insurance. Lenders like borrowers who opt for this type of coverage because it protects them. Mortgage life insurance will pay your lender if you die. While it may seem like a good way to protect your family, it is not mandatory in Canada.
What does mortgage life insurance offer?
Mortgage life insurance is not the same as mortgage loan insurance. Mortgage life insurance covers the loan in case you die, while loan insurance protects the lender in case you default. Mortgage life insurance is sold by lenders or mortgage brokers. If you have mortgage insurance and you pass away, your lender will receive a lump sum equivalent to the balance owing on your mortgage. Your family will be able to keep their home and not have any mortgage payments to worry about.
There are some drawbacks to having mortgage life insurance, such as:
It only covers your mortgage. Unlike other life insurance policies, mortgage life insurance only pays down your mortgage. It will not provide any extra cash to your beneficiaries. While not having to pay a mortgage can be a relief, traditional life insurance offers your family money in case of your death. Life insurance allows your loved ones to decide what to use the money for.
Mortgages have low rates. Compared to other loans, mortgages are low-cost. Even though it feels like a lot debt, your family may have more expensive costs to deal with, and a life insurance policy offering them cash to cover those costs may be a wiser option.
Mortgages can be refinanced. Your family may be able to refinance the mortgage, reducing the amount they pay.
Coverage depreciates. Your premiums will stay the same over the course of your mortgage, but your coverage depreciates as you build up more equity in your home.
Do I need mortgage life insurance?
Mortgage life insurance is not mandatory in Canada, which means you should only get it if you really want it. Your mortgage broker can help you decide if it is the right option for you.
The best reason to consider mortgage life insurance is if you want to provide a layer of protection for your family. Grieving can be difficult and having to cover mortgage payments after your death may be too much of a burden. If you have mortgage life insurance, your mortgage will be paid off in full if you die. This means your family will own the home and don’t need to worry about making mortgage payments.