Buying a home is a significant financial risk for a family and often requires dual incomes to cover mortgage payments. And the prospect of something happening to one partner and their income drives them to seek a life insurance policy that not only helps manage mortgage payments but also maintains the lifestyle they are accustomed to. Especially if they are planning to start a family, "The biggest factor is usually children and their future expenses: housing, food, clothing, education, and general living costs until they become financially independent," says Andrew Ostro, CEO and co-founder of PolicyMe.
Experts warn that home buyers should not rely on mortgage insurance offered by their lenders to safeguard their homes and their family's future, as it differs in several important ways from life insurance. First, the payout from mortgage insurance goes directly to the lender, paying off the mortgage but leaving the family without control over the funds. In contrast, life insurance pays out directly to beneficiaries, who can choose how to use it. Second, mortgage insurance coverage decreases over time as the mortgage is paid down, even though premiums stay the same, while life insurance typically offers fixed coverage and premiums for the policy term. Third, mortgage insurance is often more expensive, and borrowers may need to re-qualify if switching lenders or renewing, whereas life insurance rates are generally locked in for the term. Ostro adds, "For relatively healthy people, mortgage insurance can easily cost two to three times more than comparable term life insurance."
As a homeowner, how do you determine the coverage extent of a life insurance policy for your family? Many advisors recommend policies that cover your mortgage balance plus 10 to 20 times your annual income.
One reason people hesitate to buy life insurance is cost. But for many young Canadians, it's more affordable than expected. You can explore rates using insurance marketplaces like Ratehub.ca or check out resources from major Canadian life insurance providers.