Mortgage Life Insurance, should you get one?
First of all, is it the same as Mortgage Default Insurance that you keep hearing about? Dear readers, it is not the same and I don’t blame you if you get the two mixed up (small confession: I used to get the two mixed up because they sound similar!)
There is one important difference which opens my eyes wide and makes me want to commit this to long-term memory: Mortgage Default Insurance does not absolve you from your mortgage loan whereas Mortgage Life Insurance does.
Mortgage Default Insurance
Mortgage Default Insurance protects the lending institution in the case that you, as borrower, are unable to make the mortgage payments. This is a must if you are getting a mortgage loan approved with less than 20% down payment.
When the insurance policy is claimed, the insurer will pay the mortgage loan amount to the lending institution, but they will then chase after you to get the money back. You are still held responsible for your mortgage loan. What just happened is simply a change in ownership of the mortgage loan from the lending institution to the insurer.
Who are these insurers?
- CMHC (Canada Mortgage and Housing Corporation), which is a crown corporation
- Genworth, and
- Canada Guaranty, which are both private corporations image
Mortgage Life Insurance
Mortgage Life Insurance on the other hand will pay off the mortgage loan in case the borrower passed away or became terminally ill. The other reason you may want to take this insurance is because it is only offered in the beginning of the mortgage and you cannot opt in afterwards, but you can opt out anytime.
So should you sign up for this?
It depends on a few personal factors:
- Do you have enough life insurance that will pay off your mortgage and your family living cost in case of death or terminal illness? Some coverage is better than no coverage at all
- If you are now in the old age or have serious medical conditions and do not yet have a Life Insurance coverage, it is probably expensive now to get one. So you might be getting a bargain if you sign up for it because the premium is calculated based on the size of the mortgage, not your health conditions
It all sounds good, but how easy is it to make a claim?
Aha! Great question. And here lies the caveat.
When it’s time to make a claim, Mortgage Life Insurance does not work the same way as a life insurance policy.
Mortgage Life Insurance uses the method of post-underwriting whereas Life Insurance policy uses the method of pre-underwriting.
What’s the difference?
With post-underwriting, when there is a claim, the insurer will investigate if the beneficiary was insurable or not. So there is the possibility that even though you always pay the premium on time, and after investigation, the insurer may deem you as not insurable therefore will not pay off the mortgage loan.
With pre-undewriting, the insurer will verify if you are insurable before the insurance is issued. This is why before getting a life insurance, the insurer would require you to go for several medical check-ups so they get your accurate health conditions. Once they issue the insurance, they are committed to the term.
In the end it all depends on the person’s life situation.
As a mortgage agent it is my duty to discuss this option with you so you are making an informed decision.
