The Ultimate Guide To Mortgage Life And Disability Insurance

If you’re about to buy a house or already have one, you were likely offered mortgage life and disability insurance. If you choose to take life insurance, it can pay off the mortgage balance if you pass away. If you select disability insurance, the policy could make the mortgage payments for you for up to 24 months if you cannot work due to an illness or injury.

People sometimes confuse these insurances with others because there are different insurances you may be required to get with your mortgage. Before deciding whether or not you want mortgage life insurance and disability insurance, it’s important to understand what they are and what they are not. Keep reading to find out about these insurances, how they can benefit you, and why you might benefit from different options.

What mortgage life and disability insurances are not

Your mortgage advisor might have told you that you need mortgage default insurance if your down payment is less than 20% of the home’s purchase price. That’s because a home that is financed with a down payment under 20% is called a high-ratio mortgage and requires special insurance to protect the lender in case you default.

Likewise, you’ll have been advised that you also need homeowner’s insurance. Homeowner’s insurance provides various amounts of coverage for losses or damages to your home.

Depending on your situation, one or both of these insurances are required.

However, mortgage life and disability insurance, however, are optional. They don’t insure your property against any loss or damages and don’t payout any benefits from the policy directly to you.

These insurances are not required

You are not required to have life or disability insurance to cover your mortgage. They are not an approval condition for the mortgage. You can choose either one, both of them, or neither of them.

Your mortgage advisor will discuss the benefits of having both types of insurance and will encourage you to take at least one of them. It’s essential to understand your financial position and how your death or disability could impact you or your loved ones when it comes to paying your mortgage. A solid understanding of your finances, any life insurance and/or disability insurance you may already have, and workplace benefits can help you decide.

The mortgage loan is insured, not you

Mortgage life insurance will pay a claim if the policyholder passes away and the claim meets the insurer’s criteria. Disability insurance can make your mortgage payments for up to 24 months if you cannot work due to an injury or illness. It is designed to keep your mortgage loan in good standing and reduce financial stress for you and your loved ones.

However, neither type of insurance protects you financially from loss or damage to your property. Your homeowner’s policy typically covers those types of events.

Payments are made to the lender, not you

If you have mortgage life insurance, pass away, and the claim is approved, the insurer forwards the funds to the lender. The lender will use the proceeds to pay off your mortgage balance. The funds don’t go to any of your beneficiaries or your estate. 

Mortgage disability insurance works the same way. If you have a claim approved for a disability, the insurer forwards the proceeds to the lender to make the mortgage payments on your behalf, the insurance payments are not given to you. Therefore, you won’t receive any money directly and have no options regarding how to use the proceeds.

Understanding mortgage life and disability insurance

Now that you have seen what these types of insurances are not, let’s look at what they are, how they can benefit you, the cost, and the pros and cons. Your mortgage will probably be the most significant debt you have. Mortgage life and disability insurance can allow you or your loved ones to keep your home if the insured passes away or suffers a debilitating injury or illness that renders them unable to work.

Mortgage life insurance

Mortgage life insurance is an insurance product lenders offer. It can provide peace of mind if you have a mortgage because your beneficiaries will be able to keep the home in the event of your death. 

The lender will apply the proceeds from an approved claim to the balance owing on your mortgage. For example, if you have mortgage life insurance and a claim is submitted because you have passed away, the life insurance company will investigate the claim to make sure the claim meets its criteria before paying the benefit. Once the claim is approved, the insurer forwards the benefit payout to the lender to apply to your outstanding mortgage balance.

Pros of mortgage life insurance

Your lender will offer you the option to buy life insurance when you get your mortgage. Depending on your circumstances, there can be several advantages to accepting the offer.

Quick & Easy

First, the process is quick and easy. The insurance form has a few questions that you need to answer. You can be approved instantly, depending on your answers. If not, the insurer will investigate to see if they can approve you. The process can take a few weeks, but there are no invasive insurance medical exams.

Get it anytime

You can add mortgage life and disability insurance to your mortgage at any time. If you initially decline the insurance you bought your house, you can add it later or at renewal. Again, the process is quick and easy.

Cancel anytime

Third, you can cancel at any time. Cancelling is easy, too. You just have to phone the number indicated on the documents or provide written notice. Once the request is received, the insurer will cancel your policy.

Available to co-borrowers

Other mortgage holders can take the insurance as well. Mortgage life insurance allows for more than one mortgagor to be insured. If, for example, you and your spouse are joint on the mortgage, you can both apply for the insurance. If you both have insurance, you’re both protected in the event either of you dies.

Trial period

Finally, most companies offer a 30- day “free look .” If you take the mortgage life insurance and decide to cancel it within 30 days, you’ll receive a refund of your premiums.

Mortgage life insurance can be a good choice if you don’t have insurance elsewhere or if you want temporary insurance while you shop for a new policy.

Cons of mortgage life insurance

There are several reasons why you might want to skip this product. First, lenders will make it sound like a great idea, but that doesn’t make it a good choice for you. Things to consider before taking mortgage life insurance are the costs and the limitations of the policy.

Premiums can be more expensive

When comparing the costs of a life insurance policy to mortgage life insurance, you will probably find that the life insurance product your lender is offering is expensive. In addition, no discounts apply for things like being a non-smoker or having a low-risk profession.

Coverage declines, premiums stay the same

Not only are the costs of the premiums high, but you are also insured for less each time you make a mortgage payment. That’s because it only covers the amount of your outstanding mortgage balance, which decreases with each mortgage payment you make. If a claim is made, the proceeds from the policy are applied to your mortgage balance. Therefore, while your premiums remain the same, your benefit actually decreases.

Mortgage balance might not be fully covered

You may think you have life insurance for your entire mortgage amount, but this might not be the case. First, you’ll need to look at the policy limits. Some insure a maximum outstanding balance of $750,000, while others are as high as $1,000,000. Given the cost of homes in Canada, your mortgage could exceed $1,000,000. If that’s the case, mortgage life insurance won’t fully cover it.

The lender is the beneficiary

Unlike other life insurance policies, the payout is made directly to your lender and not to your beneficiaries. This restriction limits the options the beneficiaries have for the money. For example, they may want to sell the property if something happens to you. Therefore, it can be better for planning purposes to have a policy that pays proceeds directly to your beneficiaries or estate.

Age restrictions

Another restriction on these policies is age. Many of them terminate once you turn 65 or 70. After you reach the maximum age specified in the policy, your coverage ends. Other insurance options may be better for you if you anticipate having a mortgage when you are over 65 or 70.

You can lose it

Your insurance can be cancelled if you default on your mortgage or premium payments. Also, if you sell your home and buy a new one, you must reapply for mortgage life insurance. If you qualify, you may find that the premiums have increased significantly due to age. It’s also possible you won’t qualify due to health issues, so you won’t have insurance on the new mortgage. 

Mortgage disability insurance

Mortgage disability insurance is another product lenders offer when you get a new mortgage or renew an existing one. While terms and conditions can vary, disability insurance will typically make your mortgage payments for a set period if you can’t work due to illness or injury. The payments often last for a maximum of 24 months or until you can return to work.

It’s important to read the insurance certificate carefully because it will outline what is and isn’t covered by the policy. It usually covers illness or injury, but in most cases, it doesn’t cover anything resulting from a pre-existing condition.

Pros of mortgage disability insurance

Mortgage disability insurance has many of the same pros and cons as mortgage life insurance.

Quick & easy

It’s also quick and easy to apply, and you can be approved immediately. Your application may need to go to an underwriter, depending on how you answered the questions. The underwriting process can take a few weeks, and they will let you know if your application was accepted or not.

Can offer extra protection

It offers protection if you don’t have disability insurance through your employer or if the amount of coverage your employer provides is insufficient. Often, disability insurance through work covers only 60-80% of your earnings, so you could find yourself short of money without mortgage disability insurance. Additionally, making your mortgage payments by the insurer can be a huge relief, especially when you’re struggling with an injury or illness. 

Available to co-borrowers

If the mortgage is joint, more than one borrower can apply for disability insurance. Allowing coverage for multiple borrowers can be a great option since people usually qualify for a mortgage based on more than one income.

Cons of mortgage disability insurance

Before you add disability insurance to your mortgage, it’s important to make sure it’s appropriate for your situation. Here are some drawbacks to consider.

Can be more expensive

The first negative associated with disability insurance is the cost. It’s expensive to purchase, and premiums increase depending on your age. So it might not be affordable for some borrowers.

Conditions & restrictions

There are restrictions on who can qualify. You must be under a certain age (usually 64), working a minimum number of hours a week (usually 20), and may not qualify once you answer the health questions. Be sure to read the certificate of insurance, so you know what to expect in the event of a disability. 

The lender is the beneficiary

As with mortgage life insurance, once the insurer approves your claim, they make payments to the lender. The lender applies the funds as your mortgage payment. This isn’t necessarily bad, but it doesn’t allow you any flexibility regarding how you spend the money.

The waiting & coverage period

There is a waiting period of 60 days before you see any money. The waiting period means you’ll need to cover two months of mortgage payments before the insurance kicks in. In most cases, coverage ends after 24 payments, so it’s not ongoing, regardless of whether or not you can return to paid employment.

The coverage maximum may not be enough

Coverage has a maximum which is usually $3,000-$3,500 per month. So if your mortgage payments are more than the amount insurance covers, you’ll need to make up the difference.

Age restriction

Once you reach a certain age, typically 70, your policy will be cancelled even if you’re still working. It will also end if you have made the maximum claim for your mortgage account.

Consider private disability insurance

If your disability insurance through your employer doesn’t cover enough of your salary or you don’t have disability insurance through work, you can consider getting disability insurance privately. Often, these plans are less expensive than mortgage disability insurance and more flexible. So, shopping for a disability insurance policy rather than getting mortgage disability insurance could save you quite a bit of cash.

To insure or not to insure?

Both mortgage life disability insurance can offer you financial protection. Life insurance can pay off your mortgage, and disability can make your mortgage payments for you while you recover from an injury or illness.

While they can be beneficial as stand-alone products or bought together, it doesn’t mean they’re the best option for you. To understand your insurance needs, look at what you already have through work and private policies. You can then decide if you want to buy mortgage life insurance, disability insurance, or find personal policies that may be cheaper and can better meet your needs.