Do you need mortgage insurance?
If you’re looking to buy a home, it won’t be long before your mailbox starts getting flooded with mortgage insurance offers.
Mortgage insurance is a unique type of life insurance designed to financially protect your home if you die with an outstanding mortgage. The idea sounds great: Your loved ones won’t have to dip into their savings to avoid foreclosure.
But the most important questions you should be asking yourself are:
- Do I need mortgage insurance?
- Should I get mortgage insurance or buy a term life policy instead to cover all of your family’s needs, including mortgage repayment?
Continue reading to find what mortgage insurance offers and whether it’s right for you.
Different Types of Mortgage Insurance
Canadian homeowners can purchase either mortgage insurance or mortgage default insurance for their mortgages. Alternatively, they can also buy a term life policy to cover a mortgage (and more).
Getting a mortgage is likely to be the largest debt you will ever take on your life. Before you get a mortgage, you may want to ask yourself what will happen if you pass away before the mortgage debt is fully paid. Your mortgage won’t pass with you. Rather, it will be passed on to your family, who may be forced to exhaust their savings to pay it off, or sell the property and be forced to move.
What is Mortgage Insurance?
Mortgage insurance, or mortgage life insurance, pays off your outstanding mortgage balance and is designed to protect your family in the event you pass before the amortization period is completed. Mortgage Insurance ensures your family doesn’t lose their home after you’re gone. The difference between mortgage insurance and life insurance is that the death benefit, which is the same amount as your mortgage balance at any given point in time, goes directly to your lender — not your family.
For instance, let’s assume you buy a property for $200,000. You put down 20% of the purchase price, and the amortization period is 20 years.
For simplicity’s sake, let’s say the total mortgage loan that you need to pay off in 20 years is $160,000. That is your home’s purchase price minus the down payment.
If something were to happen to you during these 20 years, the mortgage lender will ask your family to clear the debt. Your loved ones may have to dip into their savings or even sell the house to pay off the mortgage.
This is where mortgage insurance comes into the picture. It pays your mortgage if you die and keeps your family from losing the home. Some mortgage insurance policies also pay off the mortgage loan if you get seriously ill or become disabled.
Mortgage insurance also goes by the names of mortgage life insurance and mortgage protection insurance (MPI). While most mortgage insurance policies step in only after your death, some also pay a benefit for a limited period, like one or two years, in case of a disability, severe illness, or a job loss.
Don’t confuse mortgage insurance with mortgage default insurance. The latter, as we will see next, protects your mortgage lender from losses caused by a mortgage default.
Mortgage Default Insurance
You need mortgage default insurance in Canada if you put less than 20% down toward a home with a purchase price of below $1 million.
The following three providers offer this type of mortgage insurance in Canada:
- Canadian Mortgage & Housing Corp. (CMHC)
- Genworth Financial
- Canada Guaranty
While CMHC is a crown corporation, the other two are private insurance companies. Mortgage default insurance is also referred to as CMHC insurance since CMHC is its biggest provider in Canada.
Mortgage default insurance pays off the lender in the event a borrower defaults on their mortgage for any reason. However, the mortgage default insurer may later go after you or your estate because you are still liable for the debt.
Here’s an example to help you understand how mortgage default insurance works:
Let’s assume you have a mortgage of $500,000 but default on your payments. However, because of unfavourable market conditions, your house could only be sold for $400,000. So you still owe $100,000 to the lender.
This is where your mortgage default insurance provider will step in and hand a cheque of $100,000 to the lender. But they may still come after you to recover that amount.
Mortgage Insurance vs Term Life Insurance
Term life insurance is a type of life insurance product that covers you for a specific period of time.
You can select the appropriate policy term to ensure your family is financially protected during the period they are likely to need this protection most. For instance, you can take a term life policy that lasts until your kids graduate from college or your mortgage gets paid off.
Term life insurance and mortgage insurance can both pay off your mortgage — but they are two different insurance products. Term life insurance is usually a better choice for most people. Therefore, don’t assume just because you are taking a mortgage, the answer to the question “Do I need mortgage insurance?” is yes. Instead of mortgage insurance, you should consider buying a term policy.
Now, let’s look at the main differences between term life and mortgage insurance.
You can pick the policy beneficiary
With term life insurance, you decide who the beneficiary will be. But in the case of mortgage insurance, you don’t get to choose. The beneficiary is always the mortgage lender, and no one else.
You can pick the benefit amount
Unlike mortgage insurance, term life insurance is meant to cover your mortgage and other financial needs. You can pick a figure that you think your family will need to live comfortably after you’re no longer there to provide for them.
You can pick the policy term
With a term life policy, you can select a policy term that corresponds to the length of your longest-term financial obligation. That could be your mortgage or another debt or your kid’s college education.
In contrast, mortgage insurance lasts only as long as your mortgage. For instance, if you have selected a 15 year amortization period, the policy’s length will be 15 years and no more.
The death benefit is guaranteed
Term life policies offer a guaranteed death benefit. That is, the payout remains the same throughout the term.
This is not the case with a mortgage insurance policy. The policy’s face value keeps declining as you repay the mortgage, even though the premium stays the same.
Your family can use the payout as they want
Term life pays the policy’s proceeds to any beneficiary you choose, like your partner, if you pass away while your policy is in force. Your family is free to use the funds however they like. If other needs are more urgent than clearing off the mortgage debt, they can use the payout to first take care of them.
Mortgage insurance, however, locks in your loved ones into paying off the mortgage, even if that’s not a priority for them.
Term life insurance is cheaper
Term life is usually considerably cheaper than mortgage insurance, especially for healthy applicants as it requires a medical test to evaluate your risk.
If you’re in perfect health, they may reward you with low premiums. Since mortgage insurance typically doesn’t involve a paramedical exam, you get no financial benefit for being in great shape.
However, there’s one situation when mortgage insurance could prove handy. If you have a serious illness, you might not qualify for a term life policy. In such a scenario, a mortgage insurance policy can be your only option if you want to protect your mortgage.
| $500,000 of mortgage life insurance | $500,000 of term life insurance | |
| Male, aged 35 |
$95/month | $32/month |
| Female, aged 35 | $95/month | $24/month |
| Male, aged 45 |
$260/month | $69/month |
| Female, aged 45 | $260/month | $49/month |
| Male, aged 55 |
$440/month | $204/month |
| Female, aged 55 | $440/month | $140/month |
Can I Use Life Insurance to Replace Mortgage Insurance?
Yes, you can. For most people, term life insurance is a better option than mortgage insurance. A term life policy usually offers a better bang for your buck and can cover your mortgage and other financial needs. Get a quote today to check how much you’ll have to pay for term life insurance.
What Happens to my Mortgage if I Sell My House?
You can use the proceeds of the sale to pay off the balance on your mortgage. However, in case the proceeds aren’t enough to cover the amount you owe on the mortgage, you’ll have to make payments to the lender until the debt is settled. You could also opt to sell the home through a short sale or refinance your mortgage instead.
Can I Cancel Mortgage Insurance?
Sure, you can cancel mortgage insurance any time you want. But should you? Well, that’s another question altogether. We recommend you don’t cancel your mortgage insurance until you have alternative coverage like term life insurance to cover your mortgage.
What is the best mortgage insurance for you?
We spread out a very decent case for why we believe mortgage protection through term insurance is the right decision for Canadian homeowners.
Armed with the above information and our estimate calculator, you’re ready to settle on the correct choice for you, your family, and your home.
The bottom line
A mortgage is a large financial obligation, probably the biggest one you’ll ever take. So it’s important you protect it.
How can you do that? Well, mortgage insurance is one way to ensure your family keeps the home after you’re gone. Another option is term life insurance.
However, the process of finding the right kind of protection for your mortgage might look difficult. But don’t worry, we’ve got you covered. We’ll help you find the perfect insurance product tailored to your family’s unique needs.
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