Running a household can be costly, particularly now more than ever, as housing and gas prices are at all-time highs. Mortgage payments, for instance, hit chart-topping figures in late 2021, with the average new mortgage loan totalling more than $355,000 in Canada, according to Equifax — and likely a lot higher in Census Metropolitan Areas, such as Toronto and Vancouver. This figure could easily rise given the Bank of Canada’s recent embarkment on a series of rate hikes expected to total 100 basis points by the end of the year.
Canadians can compare mortgage rates to find a better interest rate, but the reality is that eventually, some homeowners could be facing higher loan payments. While there is nothing inherently wrong with a large mortgage, so long as you can service the debt and still meet other bills and savings goals, it could pose potential problems for your loved ones. Should you pass away, they could become responsible for covering the payments.
For this reason, the importance of life insurance becomes more apparent for homebuyers and homeowners. A life insurance policy can provide a financial cushion for your family in the event of your death, alleviating stress and protecting your estate. Here’s how.
Choosing A Life Insurance Policy To Cover Mortgage Costs
During the homebuying process, you will likely encounter two types of insurance when applying for a mortgage: mortgage default insurance and mortgage life insurance. The purpose of these coverages varies significantly.
Mortgage default insurance
As a requirement, all borrowers with down payments of less than 20% of the purchase price must have mortgage default insurance, also known as mortgage loan insurance, from the Canada Mortgage and Housing Corporation. This type of insurance protects the lender if you can’t make your mortgage payments and default on your loan.
Typically, your premium is added to your mortgage payments and accrues interest over the term of your loan. You can, however, pay your premium in a lump sum upfront to avoid paying interest on this amount.
In the event that you pass away, your loved ones do not receive financial assistance from this type of coverage.
Mortgage life insurance
You may also have the option to purchase mortgage life insurance from your lender. This is essentially a form of balance protection insurance, designed to pay off the remaining balance of your mortgage — and nothing else — if you die.
There are caveats to this product, however. Firstly, there is a declining insured benefit or, in other words, a decreasing payout. While your premium stays the same throughout your policy’s term, the amount of money the policy is worth declines as your mortgage balance shrinks.
Secondly, mortgage life insurance is post-underwritten, meaning the underwriting of the policy (the qualification process) happens after death occurs. The issue here is that you won’t know if you are eligible until you make a claim, and in this case, it would be too late if you didn’t qualify.
Fortunately, another option is available to homeowners and non-homeowners alike — it’s called term life insurance and provides more flexibility and financial security for your beneficiaries.
Term life insurance
In this case, your dependents would receive a lump-sum payment from your life insurance of an amount of your choosing to spend however they want. Whether they use the funds on mortgage payments, tuition, or other living expenses, your beneficiaries would have options.
A lump-sum payment can be beneficial for easy access to the funds instead of being tied up in the property, as with mortgage life insurance. This way, your family wouldn’t need to sell the home to pay for funeral costs or debts in an already difficult time.
Unlike mortgage life insurance, term life insurance is independent of your mortgage. Since it is a separate policy, you can take it with you from home to home, no matter your lender.
Also, the insured benefit is the amount of your choice and never decreases. But most importantly, underwriting for term life insurance happens when the policy is issued. Therefore, you’ll know if you qualify right away.
Term life insurance terms typically range from 10 to 20 years but can be as long as 100 years. If you choose a shorter term, say a 10-year term, your premiums could increase when it’s time to renew your policy.
You may need to answer a medical questionnaire to get term life insurance, as your premium is calculated using several factors, including your age, gender, and health.
Do I Need Life Insurance?
Planning for the worst can provide you with peace of mind, knowing your family will be financially sound in the event of your death. While life insurance is not mandatory like auto insurance is for drivers, it can provide financial security to your dependents or beneficiaries.
If you were to die without a financial safety net, would your family have to scramble to make mortgage payments? This is an important question you should ask yourself when considering life insurance.
A term life insurance policy can give your family the funds to pay for your mortgage, along with many other costs, after you die — costs they may otherwise struggle to afford in your absence.
