Why You Should Be Using Life Insurance to Cover Your Mortgage
Don’t have time to read the article? Watch this 2 minute summary by our Financial Security Advisor, Aaron Moser.
So, you just bought your first home – not an easy task these days! But you have a mortgage and you’re wondering what’s the best way to protect one of the biggest assets you’ll ever own. Contrary to what your mortgage provider may have told you, there’s more than one way to ensure you’re covered (and spoiler alert, mortgage insurance is far from the best option).
Time to ReFrame what’s important, and help you make the best decision possible.
Mortgage Default Insurance vs Mortgage Insurance
Let’s quickly clear up the difference.
Mortgage default insurance (AKA CMHC insurance) is protection for your mortgage lender in case you default on your mortgage payments. This insurance is mandatory if a buyer puts down less than 20% deposit on their new home.
Mortgage insurance, on the other hand, is sold by providers to cover your mortgage payments if you were to pass away with an outstanding mortgage balance on your home. Mortgage insurance is not compulsory, although your lender will often suggest you purchase it. Read on for why you should consider another option
Do I Need Mortgage Coverage?
Paid cash for your new pad, did you? What a baller.
Unless that’s the case, you ABSOLUTLEY should have some form of mortgage coverage. Imagine the financial burden you’d leave your loved ones if you were to pass away with an outstanding mortgage. No thanks.
Right. What Are My Options?
You can either buy mortgage insurance from your financial provider or if you’re relatively healthy you can get a combination of mortgage protection (critical illness insurance and life insurance) from an insurance company. There are some pretty drastic differences between the two.
Mortgage Insurance (and why not to get it)
Mortgage insurance is purchased through a mortgage provider and although it may be convenient, it is also expensive and rigid. Essentially, mortgage insurance covers the outstanding principal balance of your mortgage (up to a certain amount) if you die. Here’s why it sucks:
- Your lender owns the policy. Upon your demise, they are the beneficiary.
- The policy coverage decreases as your mortgage balance declines. But you still pay the same amount.
- Your mortgage insurance policy isn’t portable. If you change mortgage lenders, you will have to re-apply and prove you’re healthy enough for insurance. Again.
- Your coverage isn’t flexible. Your needs may change over time, but your mortgage insurance coverage can’t.
- Once your mortgage is paid your coverage is gone. No-one you love ever sees a cent of those premiums you paid.
Mortgage Protection Through Life Insurance
Don’t despair, there is a far better option to mitigate the risk your mortgage poses. You can use a combination of life insurance and critical illness insurance to make sure you’re covered and in complete control.
Life insurance will pay out a tax-free amount to your chosen beneficiary when you die, and that pay-out can cover your outstanding mortgage balance and more. Additionally, you can purchase critical illness insurance which will provide you with a one-time lump sum payment if you’re diagnosed with a serious illness that’s covered by the policy. You can use the money for treatments, bills, mortgage payments – or anything you want really.
Here’s why mortgage protection through life and critical illness insurance is a win:
- You own the policy, not your lender.
- You choose your beneficiaries and they chose how the money is used.
- Your policies are portable. If you move or change mortgage lenders, there’s no need to re-qualify. Your coverage doesn’t decline with your mortgage balance.
- You can keep your policy for as long as you need it. Keep paying your premiums and you’ll be covered, even once your mortgage is paid off.
- You can convert the policy to one that lasts throughout your life.
To Sum It All Up
We have a clear winner in the mortgage insurance vs mortgage protection (with life insurance) showdown. Personal term insurance is most likely a better option to cover your principal residence than mortgage insurance. It’s free to apply so why not at least try.
If you’re interested in learning more about Life Insurance or applying for a personal policy, you can do so here.