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Mortgage Life Insurance

December 18, 2012

house and mortgageMortgage Life Insurance is an insurance policy that has been specifically designed to protect a repayment mortgage.  The underlying concept of this insurance policy is that if the policyholder were to die or be incapacitated, the coverage will pay off the balance of the mortgage.  This coverage specifically protects the borrower, while private mortgage insurance is meant to protect the lender from risks against default.

The general structure of a mortgage life insurance product is such; when the policy begins, the value of the insurance coverage must equal the capital outstanding on the repayment mortgage.  The policy termination is parallel to the final payment date scheduled on the mortgage.  The insurance company, who provides the coverage, then calculates the annual rate at which the coverage should decrease in order for capital values to mirror one another.  Dependent on the insurance company, there are a variety of mortgage life insurance products available in the financial market.  Some offer to pay out if the policyholder is diagnosed with terminal illness, and they are expected to die within the next 12 month. Based on the structure of mortgage life insurance, this product declines in value as the policyholder pays more of a premium to the insurer.  This is one reason why some consumers weigh out the options of traditional life insurance to see which product is a better fit.

Mortgage life insurance vs traditional life insurance

Mortgage life insurance is not required by, and the decision to initiate this product is up to oneself.  This particular insurance product has been sharply critisized by financial advisers; there are circumstances where a product of this caliber is suitable for individuals who do not qualify for life insurance products.  Mortgage life insurance is sold without qualifying, and after you make a claim (should this be the case), the insurance company compensates you in order for you to compensate the bank.  Banks do not sell this product as their own; rather it is sold through them on behalf of an external company.  If a bank tries to force you to buy mortgage insurance or discriminates against you for not buying it, it is considered illegal conduct and labelled as “tied selling”.  The term “tied selling” is forbidden under the Bank Act of Canada.

Some details of mortgage life insurance products include the following:

  • The bank is the beneficiary – this is the opposite from life insurance policies where the insurer can choose their own beneficiary.
  • The coverage is not portable – this means that the policy is tied to a specific mortgage and cannot be transferred to other properties.
  • The plan ends as soon as one spouse passes away – this is the opposite from life insurance policies which allows beneficiaries to receive a double benefit in the event that both spouses pass away.
  • The coverage is not convertible – this means that the policy can not convert the product in any form.
  • There are no cash values – when the coverage ends, no premiums are returned.

Do you need Mortgage life insurance?

The underlying question with this product is, “Does it make sense?”  To answer this question, it is best to have a financial adviser or life insurance agent perform a needs analysis, this will provide a more clear indication of whether this product is right for you.   When considering the ways of ensuring that your mortgage is repaid in the event of your death before its full term, remember to shop around to get the right level of benefits at a realistic price.  The insurance industry is highly competitive, so you should not apply for the first available policy you find, do your research first.