Canadians owe $2.06 trillion in household debt, according to the Bank of Canada, 2/3 of which is residential mortgage debt. To protect these mortgages, homeowners have options: mortgage insurance provided by a financial institution, or mortgage protection using life insurance and critical illness insurance provided by an insurance company.
- Mortgage insurance works by paying off the outstanding principal balance of your mortgage should you die, have an accident or suffer a terminal illness, up to a specified maximum amount.
- Mortgage protection, on the other hand, uses a combination of insurance policies to protect you:
Key differences between mortgage insurance and mortgage protection using life insurance and critical illness insurance
The main difference between mortgage insurance and mortgage protection using life insurance and critical illness insurance is that mortgage insurance pays the lender, and the coverage declines as your mortgage balance declines. On the other hand, critical illness insurance pays you a lump sum you can use to pay your mortgage or other expenses as you choose. Life insurance pays a tax-free sum of money to your chosen beneficiary(the person who receives the benefit) when you die. The payment can cover more than just the mortgage, as the beneficiary may use the proceeds of the policy in any way desired.
Beneficiary. In the case of mortgage insurance, the lender is the beneficiary. With critical illness insurance, you're the beneficiary and with life insurance, you can name the beneficiary.
Portability. If you change mortgage providers, your mortgage insurance doesn't automatically move with you. If you move your mortgage to another lender, you will be required to submit evidence relating to your health, and will be subject to the current rate of the new mortgage provider. With life and critical illness insurance, you can take your policy with you if you transfer your mortgage to another company, with no need to re-apply or prove insurability.
Flexibility. With mortgage insurance through a lender, your needs may change over time, but you don't have the flexibility to change your coverage. Term life insurance and term critical illness insurance plans can be converted into permanent plans at a later date.
Cost vs. coverage. With a lender-offered mortgage insurance plan, the benefit decreases as you pay down your mortgage, but the premiums remain the same. If you pay off your mortgage, you lose all your coverage. With life and critical illness insurance policies, the amount of coverage does not decrease over time (even if you repay your mortgage).