“Do I need mortgage life insurance?”

Q. I live in a townhouse and I am about to purchase a detached house. I currently have enough life insurance to cover my townhouse mortgage, but this new home purchase will increase the amount I owe. My bank is recommending mortgage life insurance. Should I take out a policy?
–Michelle

A. Mortgage life insurance is designed to pay off the rest of your mortgage in the event that you or your spouse die with money still owing on your home. It sounds like a no-brainer, but in most cases, it turns out not to be such a great deal.

“It sounds enticing, but do not let your lender trick you into purchasing such a policy,” says Dale Robyn Siegel, author of The New Rules for Mortgages. She says that instead you should call your life insurance company and ask how much it would cost to provide additional life or term life insurance coverage for the full mortgage amount. “That would be whole lot cheaper.”

The problem with mortgage life insurance is that it’s non-transferrable, so premiums are lost and the policy is cancelled if you move.

As well, the policy limit, typically $500,000, can be too low. Another drawback is that the monthly premiums are the same throughout the policy term, even though the potential payout shrinks. For example, if a homeowner with mortgage life insurance dies after 10 years of payments on a $250,000 mortgage, the lender would pay approximately $185,000 to cover the remaining mortgage debt. If that same homeowner died 20 years into making payments, the payout would be only $77,000. Finally, some policies limit claim payments until a specified time period had passed, so “read the fine print,” says Siegel.

You can’t be denied a mortgage if you refuse mortgage insurance, and in most cases, getting term life or regular life insurance is cheaper, easier and more flexible. (To compare prices, go to websites such as Kanetix.ca or Term.ca.) The only circumstance where mortgage life insurance—and its near instant approval—makes sense is when you have a disability, disease or lifestyle that makes it difficult, if not impossible, to obtain other insurance.