Canadians in general are underinsured. The average mortgage as per statista.com reached $371,584 in Q4 of 2021. Many relay solely on their insurance at work to protect their families and insure their mortgages. The employer sponsored insurance plans, if and when available, generally provide a life insurance benefit of one time the annual salary and the average Canadian salary was $65,773 in 2021 (source: jobillico.com). It is obvious that the employer sponsored plans provide a base protection that is not enough.
The most immediate solution to the insurance protection shortage is the mortgage life insurance offered directly by the lending bank. Most often, it is a contract between an insurer and the bank structured to minimize the bank risk in case a mortgage holder passes away. It pays a death benefit directly to the bank, not to the family of the deceased borrower. It is an easy and fast solution, since the offer for it comes with the mortgage papers and the approval is often immediate. But is it the best solution for the consumer?
The alternative is the traditional personally held term life insurance. It is a contract between the insured and the insurer, the bank is not involved. The insured has the flexibility to chose an insurance company to work with and also decide on the amount of benefit, the continuation of the protection and on the beneficiaries. Most of the products come with flexibility features like the ability to extend the continuation of the coverage, change the insurance from term to permanent, modify the amount of insurance and change beneficiaries. These contracts often come at cost that is a fraction of the cost of the mortgage life insurance offered by the bank, yet they provide a higher quality protection to the consumer.
One perceived downside of the personally held term insurance is that it might take longer to be approved compared to the mortgage life insurance. The insurers ask way more detailed questions and in some cases might ask for medical tests and might also contact treating physicians for more information. Once approved though, the personal life insurance comes with the guarantee that the insurance benefit will be there if needed, because the insurer took the time to properly asses the risk of the insured beforehand.
With mortgage life insurance, the approval is often instantaneous, but that leaves the door open for the insurance company to start asking questions at the time of claim.
In terms of quality of the protection, advantages are with no doubt on the side of the personal life insurance. What is surprising for many is that for healthy non-smoking Canadians the price of the personal term life insurance is often lower than the cost of the mortgage life insurance. In many cases the savings can come up to thousands of dollars per year. It is counterintuitive to have the higher quality product offered at a lower cost. The explanation lies again in the approval process – the insurer takes longer to assess the situation of the insurance applicant and with a thorough understanding of the risks, is capable of offering better guarantees and quality at a lower price.
Unfortunately, most consumers just sign for the mortgage life insurance and never look elsewhere to find alternatives and compare. The life insurance on the mortgage is one area of the personal finances where the average Canadian, with the right information and proper guidance, can amass sizeable savings and significantly improve their financial health.