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I bought my first house just before my 24th birthday, almost five years ago. Looking back I remember it being a chaotic time in my life. I was usually working long hours, and quite a bit out of town, so trying to arrange everything was tough.
I had my downpayment saved up, money set aside for lawyer fees, house insurance, a small emergency fund, and some money for things I wanted to buy for my new house.
When I bought my house I relied heavily on the expertise of my realtor, and my mortgage lender, which was my bank. I think most people do, lean on the experience or expertise of others during a time like that. I spent time with an insurance broker for house insurance. But something I didn’t put any thought into was mortgage life insurance.
It’s different than the CMHC fee for putting less than 20% down. Everyone needs to have insurance in place to cover their mortgage balance in case of their death. Dealing with a death of a loved one would be tough enough, I wouldn’t want anyone to inherit my mortgage debt, and all of the bills that come along with it.
So when my bank offered me mortgage life insurance I took it. I didn’t know anything about insurance at that time, and since it was something I needed, I didn’t give it a second thought really. What I didn’t know at the time, is there’s a huge difference between mortgage life insurance, and life insurance.
Mortgage Life Insurance
If you don’t think you have insurance in place, or you don’t know what kind you have, then you probably have mortgage life insurance.
Here in Canada, banks and lenders can only offer life insurance to cover the balance of a loan that they provide. If someone passes away, the remaining balance of the loan is paid off. Over time, the benefit of the insurance declines as you pay off the balance. However, the premiums, or the amount that you pay for the insurance, stays the same. Over time, you pay the same premium every month or year, as the benefit declines.
This type of insurance can create problems.
Because mortgage life insurance only pays the mortgage balance, there’s nothing left over for anything else. Ordinary funerals can cost thousands of dollars, and there could be other end of life expenses to go along with it. There’s no flexibility for where the money goes. So even though the mortgage balance could be paid off, it can still create money problems.
If you survived the mortgage period, and you didn’t need to use the life insurance benefit, well now you don’t have insurance anymore. Once the balance is paid off, it is done. Even in the later years, you may only have a few thousand dollars that you’re paying premium for. Because of this, it can be very expensive for what you’re actually paying for. You don’t get a lot of bang for your buck.
Term Life Insurance
Term life insurance is exactly what it sounds like. You’re buying a specific amount of insurance for a specific length of the term. You could lock in a price for the entire mortgage, or lock it in at regular intervals for the term you need coverage.
For a mortgage, term insurance is perfect. You know the length of your mortgage, and you know the mortgage amount you need coverage for. Another bonus is you can get insurance in place to at least cover the mortgage. You can add some additional coverage to take care of things like the funeral, or set money aside for your children or partners future. So if anything ever does happen to you, you know you’re not adding stress during an already difficult time.
Term life insurance is almost always renewable and convertible. Which means at the end of the original term, you can extend your coverage if you want. Premiums will increase, but as we age insurance gets more expensive anyways. Plus, at anytime we could have something happen to us which would make us uninsurable or very expensive to be insured. Things like an accident, diagnosis, or close family decrease in health could jeopardize our chance of getting insurance. So you’re not only getting insurance to protect your loved ones, but you’re insuring your ability to get insurance in the future.
Compared to mortgage life insurance, term life insurance offers a lot of value. The benefit can be level, or decline 50% over the life of the contract. You can renew it, or convert it to a permanent policy. Even if your health declines, you’ll have those options to renew or convert it without having to re-qualify for the insurance. You do get a lot of bang for your buck here.
Some people will complain about the process. Typically there’s going to be a medical questionnaire, and maybe a requirement for blood work. But honestly, it’s a pretty quick and painless process when you look at what you’re getting out of it. Plus, it won’t cost you anything, and if there is something that’s going to be come to cause concern, I’d rather know sooner than later.
My Own Experience
I was paying just over $35/month for mortgage life insurance. If I passed away it would have covered my remaining mortgage balance of about $165,000. And that remaining balance declines every two weeks as I pay off my mortgage.
I looked into my options for term insurance, and I was able to get life insurance in place very easily at a cost of about $25/month with a benefit of $500,000.
More than 3X the benefit, at a fraction of the cost. When the term for the life insurance is up, I can renew or convert it, so it doesn’t just disappear. It also gives me a guaranteed option for my entire life. No matter what happens to my health, my $500,000 of life insurance will always be an option for me.
What’s Best for You?
It’s not something we ever fantasize about, but you can match your dream house with your dream insurance. Insurance doesn’t have to just be something you have because you’re an adult. It can be tailored to your situation, just like an expensive suit.
If you’re looking to save money, personal life insurance will probably be your best bet. It’s also going to be the best that provides your family with the most benefit in a horrible time.
Life insurance isn’t a tool to get rich. Life insurance is a way to help your beneficiaries in an incredibly difficult time. Leaving them enough benefit to pay off the mortgage, pay end of life costs (funeral, debts, etc), and the ability to put money towards the future (education, children, retirement, etc), will be a blessing.
When you’re buying your dream home, pair it with your dream insurance. The insurance that best protects you and your family in case of an unexpected event.
About the Author
Winnipeg based Financial Advisor focusing on investments, financial planning, and mortgages. I prioritize education, because I believe the more we know, the more we all benefit. It allows me to help people make the most of their financial future.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.