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Mortgage Life Insurance

Mortgage life insurance is an insurance which is set up in order to protect a repayment mortgage. Should the insurance policyholder pass away while the insurance is still in effect, the outstanding mortgage would be paid for.

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How Does it Work?

When the mortgage insurance cover begins, the amount must be equal to the outstanding capital on the repayment mortgage and the termination date for the policy has to be exactly the same as the final date of the repayment mortgage.

The insurance company calculates the annual rate of decrease of the cover which in effect is equal to the outstanding capital amount on the repayment mortgage. There are a number of mortgage life insurance policies which still pay out regardless the policy holder is diagnosed with a terminal illness.

The Downside

Mortgage life insurance by its intrinsic nature declines in value as the borrower pays more towards it. Often it’s the case that either term or permanent life insurance offers more protection and is a far cheaper alternative to mortgage life insurance.

The biggest advantage that term or permanent insurance holds is that they both maintain their face value. Mortgage insurance cover on the other hand, sees a diminishing value on investment. It’s therefore fairly obvious to realize that for the lenders, this type of insurance is very profitable, but for most borrowers (although not all), there really is little to be gained.

What’s more however, lending banks are often involved in incentivizing the purchase of mortgage life insurance products to customers who are in the process of investing in a new mortgage. This in effect is on the verge of coercive tied selling practice. Coercive tied selling, regardless selling purely for self-gain or as an affiliated party, is illegal and is prohibited under Section 459.1 of the Bank Act.

There is no law stating a requirement for mortgage life insurance. Therefore, it is entirely dependent on the potential customer’s decision as to whether they wish to opt for this form of insurance as a way of protecting a property investment or otherwise.

Because of the level of criticism aimed at mortgage life insurance across all states in North America as well as in Canada and the United Kingdom, there are now far fewer banks advertising the product, although many still do manage these deals and maintain them as part of their overall portfolio.

The Upside

Regardless the criticism and all the bad press, it is well worth noting that where term life insurance is denied to a customer for whatever reason, mortgage life insurance may still be available to them. Mortgage life insurance therefore is still a legitimate way to protect against a very sizeable expense left by a breadwinner who has deceased.

Therefore, it’s not all bad, and although the criticism in many respects is well deserved, this type of insurance does still offer benefits to some people and as such should not be dismissed out of hand entirely.

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