Mortgage Life Insurance
Table of contents
We all face unforeseen circumstances at some point in our lives. A contingency plan is crucial for preparing for these challenges. If you’re the breadwinner in the family, part of this plan should be a regular review and updates to your mortgage protection strategy. In the event you are unable to work due to injury, disability or death, you will want to ensure that your family can cover mortgage payments and other financial responsibilities without facing financial hardship.
Mortgage life insurance is a form of protection that can provide financial relief to your loved ones. By having mortgage protection insurance on your mortgage, you can protect your most significant investment, your home.
Key Takeaways
- Mortgage protection insurance provides life, critical illness, disability, or job loss coverage on your mortgage.
- Mortgage life insurance will pay any mortgage balance remaining in the event of death.
- You can get mortgage life insurance through your lender as part of a group policy or through an insurance provider.
Understanding Mortgage Protection Insurance
Mortgage protection insurance is a form of insurance offered when you get a mortgage. This insurance is not mandatory but includes coverage options for life, critical illness, disability, and job loss. If you opt not to take insurance when you first get your mortgage, you can always request this coverage at any point during your mortgage term.
When you have mortgage protection insurance, they can assist you in making mortgage payments or settling the remaining outstanding balance on your mortgage if you become unemployed, injured, disabled, critically ill, or die. Each provider has different benefits and restrictions, including an age limit that the policy will terminate.
Types of Mortgage Protection Insurance
There are a few types of mortgage protection insurance that you can choose for coverage. You may want to take some or all available insurances to ensure you’re covered for all unexpected situations that could come up during the life of your mortgage.
Mortgage Life Insurance
This insurance will cover the outstanding balance of your mortgage, ensuring that if you pass away unexpectedly, the remaining balance will be paid off. This type of insurance can be beneficial if you have family or a partner living in the home who may struggle to keep up with mortgage payments without your financial support. It provides security for your loved ones, enabling them to remain in the house even if their primary earner passes away.
Mortgage Critical Illness Insurance
Critical illness insurance provides financial relief if you are diagnosed with a critical illness listed in the policy. This insurance will pay your remaining mortgage balance in a one-time lump sum up to a set amount. Generally, this type of insurance will not cover any pre-existing medical conditions, and some critical illnesses may be excluded or not included as part of the coverage.
Mortgage Disability Insurance
This insurance covers your mortgage payments for a specified timeframe if you become disabled and cannot work. Maximum monthly coverage amounts are typically limited, with total coverage and multiple occurrences over a lifetime extending for up to 24 months. Some lenders may have a 60 to 90-day waiting period before the coverage will become effective.
Mortgage Job Loss Insurance
If you lose your job, job loss or unemployment protection insurance covers your mortgage payments. This type of insurance will cover your mortgage payments for a specified time, generally up to 6 months. Depending on the policy, there may be a maximum limit on the amount of coverage for monthly payments.
Benefits of Mortgage Life Insurance
Mortgage life insurance provides numerous benefits outside of paying off the remaining balance on your mortgage. This insurance provides a tax-free lump sum to pay off the outstanding mortgage balance, which frees up funds from other insurance policies for your loved ones to cover other unexpected costs that may come up. Since the funds are tax-free, the entire amount is used to pay off the mortgage without tax implications.
With mortgage life insurance, payments are predictable and will only be adjusted if you refinance or increase your mortgage balance. You will have the flexibility to choose the coverage you need, so you can choose to have just life insurance or add critical illness, disability, or job loss for added protection.
Cost of Mortgage Life Insurance
The cost of mortgage life insurance will be charged as a premium determined by your age and mortgage amount when you apply for coverage. Typically, premiums are calculated per $1,000 of the remaining mortgage balance.
For example, if you’re 30-35, the premium could be $0.10 per $1,000; if you’re 36-40, it could be $0.15 per $1,000 of your remaining mortgage balance. If you have a $400,000 mortgage, you can expect to pay $40 per month as a premium if you’re between 30-35 and $60 if you’re between 36-40.
If you choose mortgage life insurance through your lender, the cost will be included in your mortgage payments. If you decide to purchase from a third-party insurance provider, the premium will be paid separately from your mortgage payments. If you choose coverage through a third party, the insurance can be transferred to another lender without needing to re-qualify at a higher premium as you age.
Smoking or having pre-existing conditions could impact your premiums. Some lenders may offer multi-product discounts for multiple insurance products, such as adding critical illness or job loss. The premiums will vary, so it’s essential to ask the provider what they charge.
Additionally, it’s essential to consider taking your lender’s mortgage protection while you shop for other options when getting a new mortgage. This will provide immediate coverage until your mortgage closes, so if something happens before closing, the mortgage could be paid off in full before you even pay a premium.
Where Can I Get Mortgage Life Insurance?
Your lender will likely offer mortgage life insurance, or you can purchase it from an insurance company. If you purchase through your mortgage lender, it is a group plan, giving you limited control over the policy.
If you have mortgage life insurance through your lender, you cannot transfer the coverage if you switch lenders. This means you will lose coverage unless you go through the process to re-qualify with the new lender. Additionally, insurance coverage will end if you pay off your mortgage in full. In the unfortunate event of death, the benefit is paid directly to the lender to pay off the mortgage balance.
If you have mortgage life insurance through an insurance company, you will have more flexibility in managing the policy. If you switch your mortgage, the insurance will remain active and transferable to new lenders. In the event of death, the insurance policy will pay off your mortgage directly.
Comparison of Mortgage Life Insurance and Term/Permanent Life Insurance
Mortgage life insurance is a specialized type of insurance that aims to safeguard your home by paying off the remaining mortgage. Unlike other life insurance plans, the payout amount will be based on the remaining mortgage balance rather than a fixed policy amount.
Mortgage life insurance goes to the lender directly to cover the outstanding mortgage amount. As your mortgage balance decreases, the coverage amount will decrease accordingly. Coverage will terminate when the mortgage is paid off in full or if you switch to a new lender.
Term life insurance offers insurance for a set time or term, typically ranging from 5, 10, or 25 years or until the insured person reaches the termination age, typically 70-71. In the event of the policyholder’s death during the term, the beneficiaries receive a tax-free payout to cover expenses. With term life insurance, the coverage amount remains the same throughout the policy term. Depending on the insurance policy, term life insurance may be convertible to a permanent life insurance policy.
Permanent life insurance offers lifetime coverage as long as premiums are paid or until the insured person reaches the termination age, typically 85. Like term insurance, the tax-free payout goes to your beneficiaries and will not decrease throughout the policy’s life. Permanent life insurance also accumulates a cash value that you may be able to access through withdrawals or loans. However, any of the cash accessed through the policy will be taxable.
Comparison of Mortgage Life Insurance and Mortgage Insurance
Despite their similarity in name, mortgage life insurance and mortgage insurance are two entirely different forms of insurance coverage. Mortgage life insurance protects you and your family by covering your mortgage and paying it off in full in the event of death. This is advantageous for the policyholder’s beneficiaries as it fully pays off the mortgage, allowing them to remain in their home.
Mortgage insurance, or default insurance, is required for mortgages in Canada, where the downpayment is less than 20%. This insurance protects the lender by covering the mortgage balance if you default. This does not benefit the borrower, guarantors, or beneficiaries. In the event of default, the insurer will reimburse the lender and seek repayment from either the borrower or the estate if a balance is owed after the property sale and related expenses are paid.
Frequently Asked Questions
What advantages does mortgage life insurance offer?
Mortgage life insurance provides your beneficiaries the financial relief of having your remaining mortgage balance covered tax-free in the event of your death. This allows them to free up funds from the estate and other life insurance policies for other expenses.
How does mortgage insurance work if I die before paying off my mortgage?
If you own the property jointly, the surviving owner is responsible for taking over the mortgage and making payments to keep it current. In this case, nothing happens with mortgage default insurance as the mortgage payments are up to date, and the mortgage remains in good standing.
If you are the sole owner and someone inherits the property or the estate settles it, as long as the mortgage is up to date on payments, nothing will happen with mortgage default insurance.
If the joint owner or estate cannot keep the mortgage current and defaults, mortgage default insurance will compensate the lender for the remaining mortgage balance. The insurer will then go after the joint owner or the estate to cover any additional costs or expenses related to the sale of the property that they could not recoup from the sale.
Is mortgage life insurance available from banks and lenders?
Banks and lenders offer mortgage life insurance through group plans that you can apply for when you set up your mortgage. You also have the option to add mortgage life insurance to your mortgage at a later date. If you choose to take mortgage life insurance through your bank or lender, you cannot transfer it with the mortgage if you switch lenders.
Final Thoughts
Owning a home is a significant achievement but also entails substantial financial obligations. Leaving an unpaid mortgage for your family to bear can add considerable strain to an already complicated time. This is where mortgage life insurance is a vital safeguard for your most significant investment.
Although not mandatory, it provides peace of mind and financial stability, guaranteeing that your loved ones will not have to deal with the added burden of a mortgage. It is a means to safeguard your family without any extra financial strain.
Contact our mortgage professionals to see if mortgage life insurance is a suitable addition to your financial plans.
