Street smarts for dodging mortgage life insurance

Mortgage insurance

Summertime is most often associated with relaxation, backyard BBQs with friends, travel, and of course, reflecting on the pride of home ownership. Just imagine. Lounging on your deck in the backyard, you see the lawn is mowed, your garden is in full bloom, and you can quite literally smell summer in the air. It’s absolutely perfect, and you’ve finally made it. But, are you missing something? Before summer is over, promise me one thing. You’ll go dust off that old mortgage document you signed and see if you’ve checked off YES in the box where you had the option to apply for mortgage life insurance. If you did, not so fast. You’ve just exposed yourself to the perils of mortgage life insurance. Allow me to explain.

For anyone that’s fortunate enough to have found themselves in a situation of being able to afford a home in Canada, you’ll know it’s one of the most exciting times in your life. There are so many moving parts, and so much is done at lightning speed, there’s almost no time to sit down and consider all the decisions that come with home ownership. But, now you do have time, and it’s important to start thinking of the vast differences in mortgage life insurance over an individually owned life insurance policy.

Here are the main things to watch out for with mortgage life insurance:

❌ The lender is the owner of the policy meaning they’ll be calling the shots from here.
❌ There’s no ability to name a beneficiary because the bank receives the death benefit. So, you’re unable to use the proceeds of the life insurance as you see fit.
❌ The death benefit decreases as your mortgage is paid down, but the insurance premiums usually remain the same.
❌ Mortgage life insurance only protects the mortgage debt you have. Nothing more.
❌ Your insurance is with the mortgage lender meaning if you change lenders, your policy is terminated. If you have a mortgage broker, this is even more of a reason to seek out an individually owned life insurance policy.

Perhaps the most essential thing to avoid with mortgage insurance is if you have a combined critical illness and life insurance policy on the mortgage itself. The key word there being combined. Why might that be a bad thing? If you had both mortgage life and critical illness insurance and opted for full coverage against the balance of your mortgage, that means whether you die or become critically ill, your mortgage has the potential for being wiped out. Wait, that’s a good thing, right? Not exactly. Let’s say you’ve just been diagnosed with cancer. As it turns out, it’s severe enough that you are eligible for a critical illness insurance claim, and your bank tells you that the balance on your mortgage will be paid out. But, what has also instantly taken place, is your bank has cancelled your life insurance policy, and your spouse’s critical illness and life insurance policies. How, you might ask? Since those additional three policies are also attached to the mortgage debt itself, which now ceases to exist. So, if there’s no debt, the policies are automatically cancelled.

If given the option, wouldn’t you rather own a life and critical illness insurance policy that not only paid out in the event of an eligible claim but also allowed you to keep any remaining coverage you had? That’s where individually owned life, critical illness, and disability insurance plays a vital role in proper insurance planning. It’s because they all serve separate purposes and it’s the main reason why you should sit down with a qualified advisor.

Alas, there is good news, and it comes in the form of individually owned life insurance. There are many reasons why it’s a far superior product, which I’ll unpack below, but it also allows you and your family some much-needed flexibility as life continues to throw you new curve-balls.

Your benefits of owning an individual life insurance policy include:

✔️ Premiums are often the same or less than mortgage insurance.
✔️ You’re underwritten at the time of application meaning if your health changes, the policy itself stays the same.
✔️ The death benefit and premiums will stay the same over the duration of the policy, usually 20 or even 30 years.
✔️ You’ll own each policy individually and will remain in control of it.
✔️ You get to name the beneficiary, such as your spouse or children.
✔️ Protects your lifestyle including your mortgage, replacing household income, children’s education, funeral and final expense.
✔️ Your insurance will remain with you even if you decide to change lenders. This is especially important for those who work with a mortgage broker.

It’s evident that an individually owned life insurance policy is the right choice here and ensuring you understand all your options is what we do. Our advisors at Karma Insurance can help you navigate the complexities of insurance by understanding your needs and working with you to determine the best possible solutions to protect you and your family.