Is Mortgage Insurance a Good Deal? What to Know Before You Buy

In collaboration with Sun Life

So you’re about to buy a house, eh? A great interest rate will save you thousands of dollars. But those savings could walk straight out the back door if you’re not careful. In the mortgage industry, interest rates are the main course but add-ons, like mortgage insurance, are the crême brûlée to sweeten the deal; but not always for you. There are alternatives to what the lender or mortgage broker will offer you, and they could save you a lot of money. The sooner you know what mortgage insurance is and how it works, the sooner you can shop for it. When is the best time? Ideally, before you start looking for a house and especially before you close your mortgage deal. You can even research, compare, and purchase the right coverage online from the comfort of your couch.

What is mortgage loan insurance?

First, you need to know that mortgage insurance is an insurance product you purchase through your mortgage lender. It is often called creditor protection insurance and the two terms can be used interchangeably. Mortgage insurance is designed to pay off the balance of your mortgage loan or cover the payments if something happened to you. It is often presented as a peace-of-mind benefit to protect your loved ones and your life’s biggest asset should the unthinkable happen. But is it really all it’s cracked up to be?

Is mortgage insurance a good deal?

Mortgage insurance usually isn’t a good deal for most people. There are some situations where it may be a better option, or even the only option. But you should get a second opinion to know where you stand before you buy, ensuring you have the right coverage for your situation.

Knowledge is power, and places like Sun Life can help you make an informed decision about the insurance solution that’s right for you. That way, you’ll know beforehand if mortgage insurance from your lender really is your best option long before you sign your name on the dotted line.

Protecting your home, your family, and their financial security is always a good idea. But for most people, there are much better ways to go about it. If you’re not familiar with how mortgage insurance works, it could end up costing you a lot more in the long run. Here’s what you need to know:

Mortgage insurance: your lender is the beneficiary

The mortgage insurance benefit does not go to any of your loved ones or named beneficiaries. Instead, the payout is applied directly to your mortgage loan to protect your lender. Your loved ones never see a penny and have no say in how to use that money to meet their most pressing needs.

More money, less coverage

Mortgage insurance is designed to pay off the remaining balance of your mortgage loan at the time a claim is submitted. The cost of your premiums stays the same while you have the policy, but that’s not really a good thing in this case. Your mortgage balance reduces every time you make a mortgage payment, so the cost of your premiums becomes proportionately more expensive for less coverage as time goes on. In simple terms, you end up paying more money for a decreasing benefit payout.

Expensive premiums, higher payment

Mortgage insurance premiums are often higher than life insurance premiums for the same person. This is because mortgage insurance is usually easier to qualify for, and you don’t need to complete a medical exam. But you generally end up paying more as a result. To make things convenient, mortgage insurance premiums are built into your monthly mortgage payment. But since the premiums tend to be higher, that makes your mortgage payment unnecessarily higher, too. You might not have the time to consider the impact on your budget under the pressure of your mortgage signing appointment.

Less flexibility and freedom

A mortgage insurance policy generally only covers you for the length of your mortgage term. In Canada, the most common mortgage term is 5 years. When your mortgage comes up for renewal you will need to renew your mortgage insurance policy too, meaning you could face higher premiums within a short period of time. If your health status changes in those 5 years, for example, you may no longer qualify for the product at all, leaving you without coverage while you look for alternatives. If you sell your house or switch lenders, you can’t take your mortgage insurance with you either. You’ll lose coverage and need to re-apply for mortgage insurance through your new mortgage lender.

Higher risk

Mortgage insurance policies are typically underwritten down the road, called “after the fact” underwriting. Instead of assessing your health status upfront to determine your eligibility for coverage before you pay for premiums, the health assessment often happens much later. In the unfortunate event you need to make a claim, there is a higher chance you could be denied even if your health status hasn’t changed and you’ve paid the premiums as agreed. Yikes!

An alternative product that protects you, not the lender

Luckily, there is a better way. A life insurance policy, like one from Sun Life, is more likely to give you the right kind of coverage at a price you can afford. Thanks to the new online platform Prospr by Sun Life, getting the coverage you need has never been easier. You can do it yourself, or with the help of a virtual advisor team,  all on a personalized platform.

Mortgage protection versus mortgage insurance

Mortgage protection versus mortgage insurance: they sound the same, so what’s the difference? One only covers your mortgage debt, while the other protects the people you love. They might sound the same, but they’re apples and oranges. Understanding the difference before you buy a house can save you thousands of dollars and get you the coverage you actually need.

Mortgage protection through Sun Life is a life insurance policy that protects your loved ones since it pays the benefit directly to your beneficiaries. You choose the kind of coverage you need and how long you actually need it; permanent life insurance or term life insurance, it’s your call. Premiums are often lower than mortgage insurance offered through a lender, and you have more control. Here’s how it works:

Common-sense coverage

With a life insurance policy from Sun Life, the benefit payout goes directly to your beneficiaries, not your mortgage loan. Your loved ones decide how to use the money to meet their needs. If something terrible happens, not every family may need or want to pay off the mortgage balance for any number of reasons. They will have the freedom to use the benefit as needed. You choose the amount of insurance coverage you need, which may or may not include your mortgage balance, based on your unique situation and needs.

Fair premiums, less risk

With mortgage protection insurance from Sun Life, you are the policy owner and you get to choose how much insurance coverage you want and how long you need it. Coverage doesn’t change unless you want it to. Not to mention, premiums for this type of insurance can be quite a bit cheaper for most people than a mortgage insurance add-on through a lender. Your health status is assessed upfront to determine your eligibility, which substantially reduces the risk of your claim being denied and leaving your loved ones without protection when they need it most.

You call the shots

Prospr by Sun Life allows you to shop for life insurance from the comfort of your home when it’s most convenient for you, with several coverage options to meet your unique needs.  A permanent insurance policy protects you forever, and a term insurance policy protects you for a defined period of time.

Term insurance is an excellent choice for most people who are looking for mortgage protection because premiums are more affordable and you are covered when you need it most; like earlier in life when your income may be lower, debts may be higher, and you’re more likely to have dependents like small children. A 20 to 30-year term, for example, covers you long after your mortgage renewal has come and gone. And it doesn’t matter whether you switch lenders, sell your house, or pay it off. As long as you pay your premiums as agreed, your coverage follows wherever you go.

Mortgage Protection vs Mortgage Insurance Comparison

 Sun Life Term Life InsuranceMortgage Insurance
Can it help cover your mortgage?YesYes
Can it help cover other expenses?YesNo, only covers the outstanding balance on your mortgage
Who chooses the beneficiary?You chooseNo, the bank or mortgage lender gets the money
Does your coverage change as you pay off the mortgage?No, stays the same unless you decide to change itYes, coverage decreases as you pay down your mortgage
Will you lose coverage if you change mortgage lenders?No, because it’s not tied to your mortgageYou may lose coverage and need to reapply
How do you apply?Talk to a Prospr by Sun Life advisorThrough your bank or mortgage lender

Find what you need online, in one place

Online platforms, like Prospr by Sun Life, help Canadians protect their mortgage and family with access to a group of insurance products, such as term life, critical illness, and disability insurance. And you don’t sacrifice that personal touch, you can talk with an advisor too. If not, you can research the best way to protect your family from your screen. Using online tools helps you see which coverage options make the most sense for your needs.

Heidi Unrau is a senior finance journalist at Hardbacon. She studied Economics at the University of Winnipeg, where she fell in love with all-things-finance. At 25, she kicked-off her financial career in retail banking as a teller. She quickly progressed to become a Credit Analyst and then Private Lender. This hands-on industry experience uniquely positions her to provide expert insight on loans, credit scores, credit cards, debt, and banking services. She has been featured in publications such as WealthRocket, Scary Mommy, Credello, and Plooto. When she's not chasing after her two little boys, you'll find her hiding in the car listening to the Freakonomics podcast, or binge-watching financial crime documentaries with a bowl of ice cream. Fun Fact: Heidi has lived in five different provinces across Canada and her blood type is coffee.