OB Report
February 2021
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Would You Name the Bank
Your Beneficiary?


By Debbie StuartCLU, CHS,
Estate and Insurance Planner,
Odlum Brown Financial Services Limited

houseIf you have ever applied for a mortgage, your lender likely offered you the option of purchasing life insurance to cover the mortgage. While it can be prudent to initially take out mortgage life insurance to address any coverage gap, it is worthwhile to consider replacing the mortgage life insurance policy with personally held coverage as the next step.

This month, we explore the major differences between mortgage life insurance and individual life insurance. Whether you’re a first-time home buyer or a seasoned real estate investor, it pays to explore your options.

Mortgage Life Insurance vs. Individual Life Insurance

When does underwriting occur?

Mortgage Life Insurance 
Often, after a claim is made (i.e., after your death). If the insurer determines that you were ineligible for coverage, no benefit is paid.

Individual Life Insurance 
Before the life insurance company issues a policy.

Who owns and controls the insurance policy?

Mortgage Life Insurance 
Your lender. Your insurance coverage is linked to your mortgage, and policy changes may be restricted. If you change lenders or refinance or sell your home, your existing coverage will likely terminate.

Individual Life Insurance 
You. Your insurance and your mortgage are independent from each other (although your lender may require proof of coverage). You can change lenders or refinance or sell your home without affecting your coverage. Depending on the policy you choose, you may also have options to renew coverage despite future declines in health or insurability status.

Who is the beneficiary?

Mortgage Life Insurance 
Your lender is the beneficiary. Your lender applies the death benefit directly to any remaining mortgage balance with no residual amount available for your family.

Individual Life Insurance 
You decide who receives the death benefit. For example, you can designate beneficiaries to be your spouse, children, grandchildren or a registered charity. The beneficiaries decide how to use the proceeds, whether that is to repay outstanding debt, fund education or retirement plans, or for any other purpose.

How long does the coverage last?

Mortgage Life Insurance 
As shown in the illustration below, mortgage life insurance declines as the outstanding mortgage balance declines and expires once the mortgage has been fully repaid.

Individual Life Insurance 
You choose. You may wish to have coverage for a particular term (e.g., while you have a mortgage or young children) or some form of permanent insurance for lifetime coverage. With individual life insurance, you can purchase a policy for which the coverage amount is guaranteed for the life of your contract.


How do the costs compare?

Mortgage Life Insurance 
Premiums for mortgage life insurance are typically higher than for comparable term life insurance, partially because of the limited pre-purchase underwriting (i.e., medical and lifestyle details may be omitted). Although the coverage amount declines over time with each mortgage payment you make, the premiums you pay do not. This can be true even if you significantly accelerate your mortgage repayments. 

Individual Life Insurance 
Premiums for a term life insurance policy are typically lower than for comparable mortgage life insurance. With individual insurance, you have more flexibility in choosing the type of insurance that best suits your needs and your budget.

If you are considering cancelling a mortgage life insurance policy in favour of an individual life insurance policy, please consult with a qualified insurance advisor first.

Odlum Brown Financial Services Limited is in the business of caring for your financial well-being, and insurance can be an important component to protect your plans. If you would like more information regarding life insurance or other insurance topics, please contact us through your Odlum Brown Investment Advisor or Portfolio Manager.

Odlum Brown Financial Services Limited (OBFSL) is a wholly owned subsidiary of Odlum Brown Limited offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients. OBFSL offers a variety of coverage options from many of Canada’s top insurance companies tailored to suit clients’ individual needs. Our licensed professionals are here to help you assess your position and then implement customized recommendations to meet your individual circumstances and needs. For more information, please contact your Odlum Brown Investment Advisor or Portfolio Manager.