Is mortgage life insurance mandatory in Canada?

May 3, 2022

Buying a home is a big deal. Experts estimate the average home price in Canada is over $700,000. That is a lot of money you’ll need to pay back over the life of your mortgage.

Owning a home can be exciting as it offers you some independence, and property is a great investment, but getting a home can also be confusing. There are so many facets to purchasing a property. It isn’t easy to know what you must pay for and what is optional. You want to protect your investment and your family.

In Canada, one insurance product that can help homebuyers do both is mortgage life insurance coverage. But many people wonder, “is mortgage life insurance mandatory in Canada?” Let’s examine what mortgage life insurance coverage is and whether it is a necessary form of mortgage insurance.

Buying a home is a big deal. Experts estimate the average home price in Canada is over $700,000. That is a lot of money you’ll need to pay back over the life of your mortgage.

Owning a home can be exciting as it offers you some independence, and property is a great investment, but getting a home can also be confusing. There are so many facets to purchasing a property. It isn’t easy to know what you must pay for and what is optional. You want to protect your investment and your family.

In Canada, one insurance product that can help homebuyers do both is mortgage life insurance coverage. But many people wonder, “is mortgage life insurance mandatory in Canada?” Let’s examine what mortgage life insurance coverage is and whether it is a necessary form of mortgage insurance.

What is mortgage life insurance?

Mortgage life insurance is a policy a home buyer can purchase as extra protection. However, it does not protect the homeowner but rather the lender. If the borrower defaults on their mortgage insurance payments or passes away before the loan is repaid, the insurance company will issue a payment for the remainder of the mortgage.

Mortgage insurance premiums will be added to your monthly mortgage payments. While the beneficiary will be your mortgage lender, having mortgage insurance coverage also protects your family from having to make mortgage payments after you’ve passed away. With mortgage insurance, they will be able to stay in their home, although they will not receive any cash from the mortgage insurance policy.

In Canada, there are two main types of mortgage insurance:

Lender/Bank (CMHC) insurance coverage

When you want to purchase a home but have less than 20 percent of the property value as a down payment, you’re required to have mortgage loan insurance. The main benefit of CMHC mortgage insurance is that it can allow you to get into the real estate market with a smaller amount of down payment. In other words, you can get a mortgage for up to 95 percent of the purchase price. This is an advantage in economically difficult times by allowing people to purchase property without having to save a large down payment.

Borrower insurance coverage

Various life insurance products, like critical illness insurance, disability insurance and some life insurance policies can be an advantage. If something happens to you and you are unable to work, your insurance policy would pay you benefits until you recover. That sum can help you cover your mortgage payments so you don’t lose your home.

In the same way, if you were to pass away, your life insurance policy would pay your beneficiaries a death benefit. They would be able to use this lump sum anyway they wanted, including covering mortgage costs. It can be an added level of protection for your family in an emotional time.

Is mortgage life insurance mandatory in Canada?

Unlike mortgage insurance required for high ratio mortgages, mortgage life insurance coverage is not mandatory but is an option that homebuyers may want to consider. High ratio mortgages are those where the borrower pays less than 20 percent as a down payment on the property.

Can I cancel mortgage life insurance?

Cancelling mortgage life insurance is not hard to do. Most good insurance brokers will preparea termination letter for you to sign and submit to your lender. There will not be fees or penalties for cancelling your lender policy but you will have to follow up and ensure the termination is processed and the lender insurance premiums are stopped.

Some mortgage life insurance policies through a broker have one month free to ensure you’re not paying double when moving away from the lender coverage.

How does mortgage insurance impact my mortgage payments? How does mortgage insurance impact my mortgage payments?

Your mortgage insurance premiums will be added on top of your monthly mortgage payments. In other words, the premium and mortgage payment will be withdrawn at the same time.

One thing to note about mortgage life insurance is that your premiums will generally increase every 5 years and the insurance amount declines each month. That’s because the insurance payout will be for whatever is left owing on your mortgage. And this amount decreases each month as you make your monthly mortgage payments.

Is mortgage life insurance worth it?

Yes, life insuance on your mortgage is worth it.

However, Mortgage life insurance from your lender is designed to protect the bank or mortgage lender and their investment. Yes, it does offers your loved ones the ability to stay in the home and have the mortgage paid off should you pass away but it does not create any available cash for your family. So despite having the insurance, in some cases a family will still need to sell the home if they need money to live.

Mortgages are one of the most significant debts that Canadian households carry, this type of coverage can offer peace of mind for you and your family. The lender policy is convenient because its part of the mortage process but there is far more value in owning your own individual policy through an independent insurance broker.

The drawbacks to mortgage life insurance through a lender:

Loses value over time

One of the biggest problems with mortgage life insurance is that you’ll pay the same premiums throughout the life of your mortgage, but the value of the mortgage life insurance policy will diminish over time. As you pay off your mortgage, the amount of money that your mortgage life insurance company may need to pay out if you pass away decreases.

Only covers mortgage debt

Mortgage life insurance will only pay off your mortgage debt when you pass away. This means your loved ones will still need to deal with other expenses like credit card debt, loans or lines of credit, and funeral costs.

Mortgage life insurance premiums increase each term

It no secret that premiums for life insurance increase as we get older. With mortgage life insurance through a lender your premiums will increase every 5 years and your overall coverage amount will decrease. By comparison, the premiums for a term life insurance policy through a broker are guaranteed for a minimum of 10 years and can last until age 80.

With mortgage life insurance through a lender, your overall coverage amount decreases as you pay down your mortgage. However, with a term life insurance policy you coverage amount stays the same for the duration of your policy term.

There is a lot more flexibility in owning your own life insurance policy. You can choose to manage all or part of your mortgage balance or insure for the potential lost income to your family.

A term life insurance policy is also convertible to permanent insurance without any medical questions or nurse visit. As you pay off your mortgage you can transition your coverage for estate needs and legacy planning or simply reduce or drop the coverage once its no longer needed.

There is no question, an individual life insurance policy is your best value when deciding how to protect your family. Premiums are generally lower than mortgage life insurance from the lender and far more flexible to work with.

Types of life insurance policies

Before deciding whether to buy mortgage life insurance, consider your options, such as an individual life insurance policy from a broker.
The two main types of brokered life insurance policies are:

  • Permanent life insurance – also called whole life insurance because the policy will cover you and protect your loved ones for your whole life. There is also an option to have some of your monthly insurance premium set aside in a savings-life account.
  • Term life insurance – a term life insurance policy has an expiration date. It only covers you for a set number of years, for example, 10 or 20 or 30 years. Once it expires, you’ll need to get a new life insurance policy.

Why Shelter Bay Insurance?

At Shelter Bay Insurance, we are independent insurance brokers, which means we are not paid to push any particular insurance company product. Instead, we focus on you and your specific needs.

Our team has over 200 years of collective experience in the insurance industry, and we’re happy to put our expertise to work for you.

Whether you’re buying your first home or your dream property, let our insurance agents help you find the right level of protection for your investment and your loved ones.

Contact us to book your appointment today.

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