Why You Should Avoid Mortgage Life Insurance

If you own your home, chances are you were offered mortgage life insurance from your bank. This type of insurance is sold by the banks as a flexible, low-cost way to protect one of your largest financial obligations.

If you die, get a terminal illness, or suffer an accident, your mortgage life insurance can pay the following benefits:

  • Your entire outstanding mortgage principal amount, up to $500,000
  • Up to five years of accrued interest, and
  • Any debit balance in your tax account

The concept of mortgage life insurance sounds perfectly reasonable at first blush. It makes sense to protect your family against an unexpected illness, accident, or even death.

I admittedly purchased the coverage from our bank when we bought our first home, paying premiums for the initial five-year mortgage term before I realized this type of insurance was a good deal for my bank, but not so much for me.

I declined the banks’ insurance coverage after that, including when we bought our new home, opting instead to keep enough term life insurance to protect my family. Here’s why:

Avoid mortgage life insurance offered by your bank

Why You Should Avoid Mortgage Life Insurance

You’re Not Always Covered

Mortgage life insurance is meant to reassure you that your family will be able to stay in your home should anything happen to you. But that’s not always the case when this type of insurance is sold through the banks.

This CBC Marketplace investigation looks at two families who bought mortgage life insurance coverage and thought they were protected, only to have their claims denied when they became sick or died. In each case, the insurer said the applicant had lied on their initial application form.

It turns out that even a routine test at the doctor could be reason to deny your claim, if you don’t mention it up front.

According to the report, the bank representatives selling mortgage life insurance are unlicensed and rarely trained to explain the details and legalities of these insurance products. People are paying premiums and think they are covered, only to realize later that they are not.

Declining Benefits

Mortgage life insurance is the one financial product that goes down in value as you continue to pay, yet the banks promote this as a benefit to you, stating: “Your premiums will not increase for the term of your mortgage, even as you get older. It’s comforting to know that this important coverage will remain affordable.”

The monthly premiums for a 30-something couple with a $300,000 mortgage can range from $75 – $120. After four years of payments, your outstanding mortgage balance will be reduced to $270,000, yet you will continue to pay the same mortgage life insurance premiums. That’s called a declining benefit.

Get Term Life, Instead

On the other hand, a $600,000 5-year term life insurance policy only costs about $50 per month for a 30-something non-smoker. You get twice the coverage with term life insurance for half the price of mortgage life insurance.

The other advantage of taking out term life instead of mortgage life insurance is that term life protects more than just your mortgage. The mortgage is just one expense your family will face if you die. Other family needs can include funeral expenses, your children’s education, and income replacement.

Term life gives your surviving spouse or beneficiary the option of paying off the mortgage or using the payout for other purposes. With mortgage life insurance, the bank is the beneficiary and only the mortgage will be paid off.

Final Thoughts

Buying mortgage life insurance is not a requirement to qualify for a mortgage. It’s an easy sell for lenders who suggest it at a time when you’re vulnerable and haven’t shopped around, similar to a retailer trying to get you to buy an extended warranty. Then they make you sign a waiver form if you decline the coverage.

The reality is that buying mortgage life insurance from your bank is generally a bad idea. Term life is much cheaper, more flexible, and offers greater protection than the mortgage life insurance offered by your bank.

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  1. Mrs. Picky Pincher on July 31, 2017 at 7:40 am

    Oh, this is interesting. I just got term life and it’s a relief to have it set up. I only considered mortgage life insurance because I saw what happens when you don’t have it. My parents had it on their house, but unbeknownst to my dad, my mom had removed it to save money. Well, the day came when she unexpectedly passed away. The insurance would have paid off the $100,000 principal on the house.

    So I do get why it’s unnecessary and term life is better, but there are some cases where it makes sense. Unfortunately no one has a crystal ball to tell the future–stick with term life and get a hefty policy.

  2. David on July 31, 2017 at 9:35 am

    I see that you covered term life insurance but omitted long term illness or loss of income. That also needs to be considered

  3. Susan J on July 31, 2017 at 10:46 am

    Here’s the thing. Most people have nothing. Never mind not even a will! So sign up for it when you obtain a mortgage and then shop around for other coverage. Most insurance can be cancelled within 30 days without even paying a nickel in premium. If it’s 60 days, oh well, at least you are covered. From a life and death perspective of my husband being healthy one day and dying from a brain tumour the next don’t think it can’t happen to you. And disability insurance? Absolutely. You won’t be complaining about the premiums you have paid when it covers your payments. What are you waiting for?

    • Travis on July 31, 2017 at 11:17 am

      This is terrible logic. The most important argument behind this article is that you are not covered, in the industry this is called post-claim underwriting. It means that the insurance company only has to verify your application once you make a claim.

      This means that you put in an application at 20. At 40 your spouse gets cancer. The insurance company can come back and claim that your spouse “lied” on their application because you didn’t mention some random doctor’s appointment 20 years ago. The company will claim that the symptoms you saw the doctor about once 20 years ago (headaches, nausea, whatever) can be indicators of cancer. The company will claim you covered up these symptoms by lying about that one time you saw the doctor. They will deny your claim. And if you say that common sense says that a forgotten one-off visit from 20 years ago doesn’t affect the present, then you don’t know insurance companies.

      Term life insurance is much better. Assuming you don’t get denied, mortgage insurance only pays the mortgage (in the example above, they will pay your mortgage after you paid it for 20 years, you already did the heavy lifting in paying it off) whereas term life will give you a pile of cash that can cover anything. And this cash-pile doesn’t shrink with time. Having a paid-off house doesn’t make up for lost income, having a pile of cash does.

  4. Jaymee @ Smart Woman on August 29, 2017 at 11:08 pm

    My coworker is Type 1 Diabetic but she is otherwise healthy and being a nurse, she keeps on top of this condition all the time. But unfortunately, no one would give her life insurance (or they offer at ridiculous premiums). I guess in these cases, mortgage insurance has its place to protect her partner if she dies.

    Or are there other options for her?

    • Mike C on October 24, 2017 at 11:12 am

      The Bank would most likely decline the policy if your coworker passed away as a pre-existing condition. A lot of the time the bank will accept the premiums but not pay out based on examples such as this one. The “ridiculous premiums” offer guaranteed protection

  5. Travis on August 30, 2017 at 10:07 am

    See my above comment on post-claim underwriting (or as the article calls it, the “details and legalities of these insurance products.”) Anyone can apply, they will take your money. They will only verify that you are covered once you make your claim.

    So your diabetic colleague can pay up front, and her spouse can make a claim years down the line only to learn that they were never covered when the company denies their claim.

    It’s a difficult situation to be in, to get mortgage insurance (or any insurance) successfully your friend would have to ensure that her pre-existing condition would be covered (something most companies would not cover easily or cheaply.) No matter what, she should never deal with unqualified salespeople. Lots of people who sell insurance (through banks or through credit card companies) are not qualified to sell it, and have no idea what they’re doing, they just have a script and a quota. Generally people sign up for these deals only to learn later on that they were never really covered anyway, or the benefits are negligible compared to what they paid over the years.

  6. boomer on October 24, 2017 at 4:17 pm

    According to the report, the bank representatives selling mortgage life insurance are unlicensed and rarely trained to explain the details and legalities of these insurance products.

    This statement is terribly misleading. Bankers don’t “sell” insurance. they merely provide the application, not unlike a retail sales associate offering you a credit card application – they have no control over whether you are approved or declined. The mortgage insurance application is then forwarded to the insurance company who, based on the information provided by the applicant, makes the coverage determination – not only once you make a claim. Sometimes, follow up with the applicant’s doctor is done for clarification.

  7. Sho Bansal on May 17, 2020 at 8:10 am

    I love your article. Even though I didn’t understand details of mortgage insurance the concept did not work out in my mind hence declined it both times. You have 2 really super cool points1) with term life insurance covers more than your mortgage, and it is upto family to decide based on the needs at that time how they would live to apply the funds.2) your mortgage insurance premium does not reduce even though your mortgage prinicipal amount changes. thank you!

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