How Does Mortgage Life Insurance Work in Canada | Exclusive Facts

How Does Mortgage Life Insurance Work in Canada?

how does mortgage life insurance work in Canada

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Most Canadian households say that they would have difficulty paying for everyday living expenses like mortgage if the sole breadwinner were to pass away. It doesn’t have to be that way!

Canada mortgage insurance is a simple, easy, and affordable way to guard your family’s future, with a policy that pays off the mortgage balance if the mortgagor dies. This article answers the question; how does mortgage life insurance work in Canada.

If you’re buying a home, you may have to think about “how does mortgage life insurance work in Canada” a lot. Hence you start making choices, from finding the best mortgage rates to choosing your colour scheme. It’s good to know you also have options when it comes to protecting your mortgage and your family’s finances from the unexpected.

While you know you’ll need insurance and insurance benefits, it is pertinent to understand the different coverage types and policies.

Introduction 

Acquiring a house could be one of the most significant investments you’ll make in your lifetime, and your mortgage will likely be your most expensive yearly expense. In the event of your death, your dependents may not be able to afford regular mortgage payments. That is where how does mortgage life insurance work in Canada comes into play. If you are purchasing a home or renewing an existing mortgage, you may be offered group insurance by your lender or broker. You have put in a lot of money towards your home, so it is worth taking steps now to protect your investment.  

Mortgage life insurance is typically sold to new homeowners who may be concerned that an unexpected death or illness could leave their dependents with a huge mortgage. 

What Is Mortgage Life Insurance?

Mortgage life insurance is the type of life insurance you can purchase as a mortgage borrower, which is designed to pay off or pay down the mortgage loan if you pass away. The insurance cost payable under the coverage is always applied to the mortgage balance. This mortgage life insurance can help your family still reside in the home, even if the basic income used to make the mortgage payments is no longer available. This is why it is important to understand how does mortgage life insurance work in Canada.

Mortgage life insurance could also be easier to qualify for coverage than with personal life insurance. It also highlights an easy application process. Since mortgage life insurance is group insurance, it can result in lower premiums because the risk is spread out over many people. 

One of the benefits of having mortgage life insurance as part of your overall financial plan is to clear out money you may get from other insurance policies. For instance, if you know how does mortgage life insurance work in Canada, you can use the money you earn through insurance from employer benefits or a personal life insurance policy for other expenses other than the mortgage, such as utility bills or university tuition for children. 

Mortgage life insurance usually comes with a 30-day or 60-day “free look” period when all premiums paid are refundable if you opt-out of your coverage. This process enables you to buy coverage right away and still have the time to review the insurance certificate. It also allows you to talk with an advisor on how does mortgage life insurance work in Canada, and to decide what type of life insurance may be best for your financial situation. 

Mortgage life insurance pays off or decreases the outstanding principal owed on your mortgage. Your financial institution may give you the option to buy mortgage insurance when you buy a house. It depends on the institution and the number of people on the mortgage that can be covered by mortgage life insurance—up to eight. The insurance is offered to you by a large insurer and not your lender or financial institution.

Typically, mortgage life insurance will cover all or a certain percentage of your outstanding mortgage balance. Financial institutions each have their set maximum insurable limit, and they cannot cover you above that. If your mortgage were huge, this limit might not cover 100%.

If you are familiar with how does mortgage life insurance work in Canada, you’d understand that there are also options to put in place mortgage insurance that offers coverage if you lose your job or become disabled or very ill. This insurance may also be given separately as mortgage critical illness insurance or mortgage disability insurance.

How Does Mortgage Life Insurance Work in Canada?

One cardinal fact about how does mortgage life insurance work in Canada is that mortgage Life Insurance is different from life insurance in that it utilizes a system of decreasing payouts. Your premium is calculated by the size of your mortgage and down payment made.

The insurance company will tie the payout (i.e., the lump sum paid in the event of your death) to your outstanding mortgage amount. It means that, as you pay off your mortgage, the payout slowly reduces, but your monthly mortgage payment stays the same through the term of your insurance.

Understanding Life Insurance

You can decide to buy mortgage insurance from a financial institution. Or you can purchase mortgage protection with life insurance and critical illness insurance from an insurance company.

How does mortgage life insurance work in Canada? Mortgage insurance works by paying off your mortgage’s outstanding principal balance, up to a certain amount, when you die.

While Mortgage protection uses a combination of insurance policies to protect you:

Term life insurance covers you for a particular period, such as 10, 15 or 30 years. It can be convenient if you’re looking for less expensive insurance. While the premium cost may be low for the first term, the cost will increase when the time to renew comes. Buying coverage for a duration long enough to match your mortgage term – 30 years, for example – will keep the cost steady.

Permanent life insurance can be more costly at first, but it covers you for the rest of your life. The amount you pay can either be sure to stay the same or vary over time, depending on the type of insurance plan you pick. 

Critical illness insurance offers a one-time payment if you are diagnosed with a severe illness that is covered under the policy (and if the other policy conditions are met). You can use the money for your medical expenses, to pay off your mortgage or for anything else – it is up to you.

Critical Differences: Mortgage Insurance and Mortgage Protection with Life and Critical Illness Insurance

The cardinal difference with mortgage insurance is that the payment goes to the lender. The amount you’re covered for decreases as your mortgage balance declines. With mortgage protection, critical illness insurance provides a one-time payment you can use for your mortgage or other expenses as you wish. And life insurance pays tax-free cash to your selected beneficiary (the person who receives the benefit) when you die. The payment can also cover more than just the mortgage policy. The beneficiary may utilize the money for any reason. In summary:

  • Beneficiary: With mortgage insurance, the payout goes to the lender or financial institution. If it is critical illness insurance, the money goes to you. With life insurance, it goes to whoever is named under beneficiary.
  • Portability: If you switch mortgage providers, your mortgage insurance will not automatically transfer with you. If you transfer your mortgage to another financial institution, you will have to prove that you are in good health. You will also pay the mortgage interest rate the new mortgage provider offers. With life and critical illness insurance, you can take your policy with you if you move your mortgage to another insurance company. There’s no need to apply again or prove your health is good enough to be insured.
  • Flexibility: With mortgage insurance through a lender, your needs may change over time, but you don’t have the flexibility to change your coverage. With mortgage protection, term life insurance and term critical illness insurance plans can be converted into permanent plans later on.

What You Need to Know about Bank-Owned Mortgage Life Insurance

When you file a claim, you may find out that you aren’t eligible for coverage as a result of Post-claim underwriting. Mortgage insurance policies are “generally underwritten after the fact,” which means that the first time the insurance company will take a proper look at your case is once you file a claim. It may very well find that something violates the insurance contract. This situation would leave your family without coverage just when it is most needed. You could just be paying for insurance you never had.

This is not the peace of mind most homes crave. Hence the need to equip yourself with knowledge on how does mortgage life insurance work in Canada, you don’t want to find yourself in that mess.

Quite incredibly, banks can issue insurance to you only to deny the coverage years later. As improbable as it may seem. Many citizens of Canada pay premiums believing they are covered, only to find out – when it’s too late – that they never had insurance in the first place.

If you purchased mortgage protection insurance, go through your policy carefully to ensure that there is nothing that could subsequently exclude you from coverage. Again, it is best to fully understand how does mortgage life insurance work in Canada.

The Payout from Mortgage Protection Insurance Diminishes with Your Mortgage.

These kinds of policies cover just your outstanding mortgage, meaning the payout shortens as you pay off your mortgage, insurance premiums, conversely, stay the same through the insurance term.

  • Unlicensed Staff with No Advice. 

Bank workers and “mortgage specialists” who sell mortgage life insurance are not licensed and barely have insurance training. Bank staff generally are not qualified to explain the details and legalities of insurance products. They likely do not understand how does mortgage life insurance work in Canada.

It may not seem like a drastic issue, but ensuring you and your family are adequately protected is cardinal. Life insurance can help mitigate the financial stress on your family and your loved ones in the event of your death. If it is an individually owned life insurance policy, your beneficiary can use the earnings to help replace lost resources, pay outstanding debt and address other crucial financial needs.

Unfortunately, many families who were not conversant with how does mortgage life insurance work in Canada found out that they didn’t have the right type of insurance or an adequate insurance amount after the whole process. Don’t let it happen to you.

  • Lack of Control

Dealing with an individually owned life insurance policy means you are the policy owner. You decide the amount of insurance and who the beneficiary is. Your dependants decide how to spend the insurance benefit pay off the mortgage, help fund education costs for your children, etc.

With bank-owned life insurance, you are not the policy owner. You don’t have control over the insurance proceeds – it pays the mortgage, and that’s it. You can’t have a beneficiary because the bank is the beneficiary. That’s bank-owned how does mortgage life insurance work in Canada for you.

  • Your Banks Take the Payout, Not Your Family.

Assuming the claim succeeds, mortgage insurance ensures your family won’t have to worry about mortgage payments if you die or become incapacitated. In the event of your death, the beneficiaries named in your policy can rely on a lump-sum payout that will cater to the outstanding balance. The policy will typically cover your monthly mortgage payments till the debt is doused.

Mortgage protection insurance means that any payout will go to your mortgage lender, not to you or your family.

  • When You Renew Your Policy, You Might Get Burdened with a Higher Premium

With mortgage protection insurance, you will need to renew your policy at the end of your mortgage term. Your new periodical payment will depend on your — now lesser — outstanding mortgage balance, but that doesn’t mean you’ll be paying less. Because you are older than you were, your premium won’t necessarily decrease; in fact, it may increase.

  • Consider Simple Life Insurance Instead.

Avoiding mortgage protection insurance doesn’t mean you have to be without coverage. Instead, you could buy life insurance. With life insurance, your payout lingers through the term of the policy, and the money comes with no strings attached. For instance, if you had a $200,000 mortgage and took out a policy for the same amount, your beneficiaries would still receive $200,000 even if you had paid out the mortgage in full when the claim is filed. And life insurance is generally much affordable, too.

Life Insurance – Individually Owned vs. Bank-Owned

Individual Insurance PolicyBank-sponsored Insurance Policy
Owner of policyYouBank
Type of Death Benefit Never changes –always constant during the lifetime of the policyDecreases with every mortgage payment
Beneficiary – Who gets the money if you die?Your choice – Anyone you wantNo choice – The bank
TermYour choice – typically 5, 10 or 20-years, the  terms are readily available, frequently with the option of translating to permanent insurance wheneverNo choice – your coverage is over, hence the mortgage is paid or moved to another lending institution
Number of CoverageYour choice – you can buy as much or as little life insurance as you wantNo choice – Coverage joins mortgage amount owing and decreases as debt is paid. Your premiums do not drop accordingly
Premium paymentsYour choice – Most insurance companies provide monthly, quarterly or annual payment programmesNo choice – Insurance premiums are attached to your mortgage payment
How the insurance proceeds are used in the event of deathYour choice – Life insurance earnings are paid as tax-free cash, and your beneficiary can use it anyhow they chooseNo choice – Insurance proceeds are paid straight to the bank
Other uses for your policyYour choice – you can apply the same policy to provide your general life insurance needs like paying off outstanding money owed or funding your children’s tuitionNone – The current mortgage amount alone is covered.
Premium discountsPremium is influenced by gender, age, stage and smoking level.Premiums usually the same for all clients of same age
Professional adviceYes – individual service from a licensed life insurance advisor to look into your financial security concerns.Typical advice is restricted to just mortgage insurance product 
Regulated salesYes – Only licensed life insurance agents can sell individual life insurance policiesNo – – Retail bank staff and mortgage representatives are not required to meet life insurance license or education requirements.

Is Mortgage Life Insurance a Good Idea?

A bank mortgage insurance policy works well for the bank – but it doesn’t take the place of standard term life insurance. When dealing with how does mortgage life insurance work in Canada, please note that while bank-owned mortgage insurance plans may seem convenient, they lack flexibility, affordability, and breadth of coverage, thereby exposing your loved ones and beneficiaries to financial strain in the event of your death.

Factors to Consider before Taking Out Mortgage Life Insurance

Mortgage life insurance is a good idea. It is precisely tailored to pay off some or all of your mortgage in the event of your death, as well as some interest. There are, however, lots of factors to consider on how does mortgage life insurance work in Canada before signing your name on yet another dotted line.

Cost Considerations

Mortgage life insurance is often not as cost-effective as other life insurance. Canada’s online legal magazine, Slaw, gives an example below:

Take the instance of a male non-smoker, age 31, with a $250,000 mortgage. The average monthly premium for ten years for life insurance from the Canadian Bar Insurance Association (CBIA) would actually be over $23 in a month.

A major bank’s mortgage insurance would cost only over $32 per month (40% more) for the same amount. Besides, at the end of 10 years, the CBIA coverage would remain $250,000, while the mortgage insurance policy would have decreased by over $50,000 to reflect the current outstanding mortgage. 

Outstanding Mortgage

Mortgage insurance policy is worthless the more you have it because it is tied to your mortgage balance. Even though it is useless, the premiums that you pay to the lender remain the same.

When you are considering how does mortgage life insurance work in Canada, you’ll have to acknowledge the fact that you will still need to pay for more contingency coverage apart from the mortgage life insurance itself. Also, mortgage life insurance is tied to your mortgage balance, and it only covers your mortgage.

That is that. Any other expense that may need to be taken care of – as well as moving, a funeral or burial, schooling if you have children or anything else that will be utilized when you pass on – are separate costs that have to be covered somehow.

Both term and permanent life insurance are supposed to fill in for your income, at least for a while after death, while mortgage life insurance will just cover your mortgage. Your coverage will be less than it could have been if you were to get a separate life insurance policy because your lender won’t give you a mortgage that’s more than a certain percent of your income.

Pitfalls of Coverage

We do not always think about the other end of insurance, but there is also a difference in the way a vast majority of lenders underwrite the policy for covering your mortgage. It sounds bizarre, but with some mortgage life insurance policies, you can sign when you get your mortgage, pay the premiums for the lifespan of your mortgage, and still be turned down when you are ready to make a claim. This is as a result of something called post-claim underwriting which has been aforementioned, where your fitness for life insurance is only confirmed after a claim is made.

A significant difference is called post- and pre-underwriting, So when you buy mortgage insurance at the bank, it’s post-underwriting. With life insurance, you can acquire pre-underwriting, which means that the insurance company binds itself to the insurance. You’re just finding out if you are eligible to be insured before the insurance is delivered.

Post-underwriting is often employed with mortgage life insurance, although the underwriting process may depend on the size of the mortgage. Sometimes there may be restrictions on the amount of mortgage insurance that a company will offer you; for instance, if your mortgage is higher than the maximum limit on the mortgage insurance, only that amount will be covered. If you are within that limit, it will be paid out.

Like mortgage default insurance, mortgage life insurance does not pay you but the lender. You cannot affect the status of the beneficiary on your mortgage life insurance policy. A way to think about it is that your lender is the sole beneficiary of your life insurance policy, contrary to your spouse, child, or anyone you pick with other kinds of life insurance policies.

Like some term life insurance, there is an expiration date to mortgage life insurance, although there is no option to restart when the term ends. An “Annual State of the Residential Mortgage Market in Canada” report from 2013 says that the real contracted period of mortgages within 2010-2013 was just short of 15 years. Based on how old you are when you get your mortgage, you have to think about your ability to get life insurance when you repay your mortgage when you are above 15 years.

You will still require coverage for your other expenses, but it will be more costly for you to acquire life insurance at that stage than it would have been if you had acquired it when you were younger. And if you let go of life insurance at that stage, then you have to ensure that you have enough to cover the needs of your spouse and dependents in your other savings accounts and investments.

Another shortcoming to consider is that the people selling the mortgage life insurance to you are mortgage specialists and not just insurance agents. Therefore while they may know the nitty-gritty of mortgage contracts, they possibly do not know that of insurance as well. If they do not know these ins and outs, then they won’t be able to explain them to you.

What Would You Benefit from Mortgage Life Insurance?

First off, there is a lot to benefit from learning how does mortgage life insurance work in Canada. If you are old or unhealthy, It could be right for you to choose a life insurance mortgage. This is because the premiums are not dependent on your medical condition, so you would not pay the huge premiums that come with being in poor health or at an old age as you would with other different kinds of life insurance. However, considering the kind of underwriting that your mortgage life insurance employs, this may be an element to consider when making a claim.

In the end, mortgage life insurance is a suitable insurance product. You can get mortgage insurance as you get your mortgage. Like your mortgage default insurance premiums, your mortgage life insurance premiums can be included in your monthly mortgage payments. Even so, mortgage life insurance would be advisable for some people, despite its shortcomings. It is advised that someone accept their mortgage insurance offer and then seek other means. The reason is that it may be considered insurable by the definitions of mortgage insurance in its basic terms. Still, once they undergo underwriting, something new may be discovered, which may take away their insurance coverage. 

Remember that you can cut off mortgage life insurance at any time, but you cannot get mortgage insurance later in the lifetime of your mortgage.

Know Your Rights and Liabilities in Mortgage Life Insurance

Voluntary Code of Conduct: Authorized Insurance Activities

Good news! Banks in Canada banks have concluded to be bound by a voluntary code of conduct that obliges them to produce a clear, understandable report in the documents related to approved insurance products, including mortgage life insurance. Each bank is liable for ensuring that its representatives implement, understand, and follow this code. Each bank has an appointed official in charge of conforming to the regulation.

The “disclosure” section of the code of conduct states the following:

“Banks are committed to providing clear and understandable disclosure in the documentation related to authorized insurance products. This helps consumers to make informed decisions about the insurance products promoted by banks. Banks will provide each eligible customer who is accepted for insurance coverage with disclosure documentation that sets out:

• that the product being applied for is an insurance product;

• key terms and definitions related to the insurance;

• all customer fees and charges associated with the insurance product and how they would be payable;

• that insurance coverage from a specific company is optional if a separate charge is levied for the

coverage (an example of insurance for which a separate charge is not applied would be coverage

through a specific credit card);

• name of the primary insurance company underwriting the insurance product ;

• how and when the customer will be notified of acceptance or rejection of the insurance coverage;

• when insurance coverage would come into effect and when it would terminate;

• the duration of any “free look” period during which, should the customer elect to cancel the insurance

coverage, all premiums charged would be refunded;

• the customer’s responsibilities and the right to cancel insurance coverage at any time;

• terms and conditions that might limit or exclude coverage;

• claims procedures; and

 how to obtain additional information about the insurance coverage.”

What to Do If You Feel Your Rights Are Being Violated.

If you believe that a federally regulated financial institution has violated or disrespected your rights, feel free to communicate with the Financial Consumer Agency of Canada.

FAQs on How Does Mortgage Life Insurance Work in Canada

Conclusion: 

Like every other thing in the life insurance sector, the suggested first step is to compare life insurance quotes from multiple companies. Whether you go for mortgage insurance or not, the foremost thing is that you should be covered for all your outstanding debts one way or another. The reason being that entirely skipping on every insurance could pose a risk to the financial life of your loved one and beneficiaries in case of any unprecedented event. with that, the question, “how does mortgage life insurance work in Canada” has been addressed!

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