Your home is the biggest asset you’ll ever own. So how should you ensure your home, and family, is protected should something happen to you?  What happens if you have an accident or become ill and suddenly lose your income? Recovery may come with a significant financial cost that impacts both you and the people close to you.

About two million homeowners are believed to have policies, and research by CMHC revealed that before the start of the recession 28% of premiums were paid out in claims. That figure is likely to be higher now, as still a growing number of people are told to clear their desks.

If you have a mortgage on your home, chances are you’ve gotten plenty of offers for mortgage protection insurance. Why does anyone need mortgage protection insurance anyway?

What Is Mortgage Protection Insurance?

Generally speaking, mortgage protection insurance will cover some or all of your monthly mortgage payment in the event that you lose your job, are critically ill, or become disabled. Most of these policies also pay off your entire loan should you pass away. Policies can differ greatly from one agency to another, so you need to know what a given policy offers for the price.

In fact, Mortgage Protection Insurance uses a combination of insurance policies to protect you:

Term life insurance

Term insurance covers you for a set period of time – such as 10, 15, 20 or 30 years – and can be suitable for homeowners looking for low-cost insurance. One thing to watch for: while the premium may be low for the initial term, the cost may increase when the time comes to renew.

Permanent life insurance

Permanent insurance can be more expensive initially, but provides coverage for life. Sometimes mortgage life insurance is a good idea. For example, if you have a condition or illness that might make it difficult or impossible to get life or disability insurance separate from your mortgage. Premiums can either be guaranteed or variable, depending on the type of plan you choose.

Critical illness insurance

Critical illness coverage provides you with a lump-sum payment, or monthly payments, you can use for medical expenses, or to cover your mortgage payments, should you be diagnosed with a serious illness that’s covered under the policy (and you meet the other policy conditions). How you use the benefit is up to you.

Be wary of insurance offered by your lender

It’s a standard business practice, and often even a compliance requirement, for lenders to offer add-ons and this includes all sorts of insurance relating to mortgages and property in general (contents insurance etc.).

Banks are prohibited from selling most types of insurance in their branches other than life and disability insurance on credit products. The Canadian Government has purposely done this to encourage competition in the insurance industry (primarily to ensure low premiums) as well as to avoid tied selling (needing to buy insurance in order to get approved for a mortgage).

Unlike other types of insurance, it’s difficult to get a quote for mortgage protection insurance online. Prices for mortgage protection insurance can vary widely. Some people don’t qualify for term life insurance because of their medical history or current poor health – and aren’t eligible for a group policy that doesn’t require medical underwriting (employer life insurance may not require a medical exam, for example). For these individuals, mortgage protection insurance could be a useful alternative.

By all means consider what they’re offering but then do some independent research into what else is available. You may find insurance cheaper if you buy independently.

Insurance is worthwhile and, in many cases, a sensible option. But sadly the banks and insurance companies are all about profits and often can’t resist

  • Often overcharging, and
  • Adding so many small print exclusions that a policy might turn out to be worthless when trying to claim (i.e. declining to pay because of a minor pre-existing medical condition from 20 years ago is just one trick for health or life related insurance)

One of the reasons the insurers can overcharge is that many consumers have no idea what is a sensible price to pay. For example, if you went into a corner store to buy a can of Coke and it was $5.00 you wouldn’t buy knowing it was ridiculously overpriced.

What if you were quoted $350 for a life insurance policy – one which you’d never bought before and didn’t have any experience with. How would you know if it’s a good deal? What if it’s 200% overpriced?

The Bottom Line

“The real enemies of our life are the ‘oughts’ and the ‘ifs.’ They pull us backward into the unalterable past and forward into the unpredictable future. But real life takes place in the here and now.”… Henri Nouwen

Life can be unpredictable. Financial experts usually don’t recommend any insurance product that only pays certain bills. If you’re concerned about your spouse or children inheriting a mortgage they might not be able to pay, term life insurance is the best option for those who qualify. Even though some policies are more flexible now, people should do some research before making a choice between creditor and term insurance.

Engage the help of a licensed Insurance Agent. You will receive independent advice that is sure to open your eyes to the pros and cons of all the options available to you. You owe it to yourself and your family.