The Right Kind of Mortgage Protection

If you’ve had to obtain a mortgage to purchase a home or condo, you will have noticed the number of times insurance was discussed. Usually, the first time this discussion comes up is when you’re faced with putting 20% of your own money towards the purchase price or having to pay extra to CMHC for mortgage insurance. For some, this decision (and added cost) may not have been something you were anticipating. So when the discussion about creditor mortgage life insurance eventually arrives, the question then becomes - do I need it or not?

Let’s start by reviewing what creditor mortgage life insurance is— it pays the lender the remaining mortgage balance should you pass away. Now let’s consider why you may need it. If you and  a spouse or partner find paying for the mortgage with your combined incomes manageable, then consider if this may still be the case if one of you were to die prematurely? Would the survivor be able to continue paying the mortgage payments, or would he or she be forced to sell the home? If you see the value in eliminating the debt burden for your family and allowing them the financial flexibility to remain in your home, then this is the only product to get, is it not? Not true! In fact, creditor mortgage life insurance is more restrictive than two other options - group & individual life insurance. Here are some positive and negative things to consider with each option:

Creditor Mortgage Life Insurance

(+) Convenient: Most lenders will offer this coverage as part of their mortgage applications and ask a few basic medical questions for which the answers are either 'yes' or 'no'.

(-) Some lenders do not verify your medical insurability and coverage under the plan until a claim is made (no under- writing). At the survivor's expense, some can request an Attending Physician's Statement (APS) be obtained to verify medical history before a claim is paid.

(-) The benefit amount is paid to the lender. This may not seem like a bad thing, but there is no flexibility for the survivor to use the money to partially pay down the debt (especially if it's fixed at a low rate) and invest or spend the difference based on needs.

(-) At the time of application, there is no flexibility to choose the amount or type of coverage.

(-) The premium (usually charged PST) is calculated based on your age and initial mortgage balance, but the benefit declines with the reducing balance.
 
(-) If you choose to refinance your mortgage with a different lender at the end of your term, most do not let you carry over the coverage.

Group Life Insurance

(+) A small base benefit is offered to every employee in the group regardless of health.

(-) The benefit amount is usually a multiple of income up to a maximum (1-2X salary). With some medical questions and underwriting, some plans allow you to increase your coverage.

(-) The cost of the coverage is not guaranteed and increases with age. Since a base amount of coverage is offered to everyone in the group regardless of age or health, younger & healthier employees tend to subsidize the cost of older, less healthy participants.

(-) The benefit is contingent on your employment with the company. If you lose your job, decided to change employers or work for yourself in the future, most plans only allow you to take coverage with you by conversion into a limited selection of more expensive options. There are also often maximums which limit the amount that can be converted.
 
(-) The company is the owner of the group plan and can choose to change or remove benefits without your permission.

Individual Term Life Insurance 

(+) At the time of application, you can choose the amount and type of coverage to fit your needs.

(+) As the owner, the amount of coverage can never decrease without your consent.

(+) The premium is guaranteed not to change for a time period (usually
10 or 20 years) regardless of any future changes in your health or lifestyle.

(+) Healthy and low-risk lifestyle people can benefit from cost reductions.

(+) You choose how long you wish to keep the coverage. As long as you keep paying the premium, you can keep the coverage until its expiry date.

(-) More effort to complete - medical tests and doctor’s reports may be needed initially. However, these are paid for by the insurance company.

Talk to your RGF advisory team about how these options fit into your overall financial plan.