The longer you’re in a relationship, the more your finances become intertwined. This is especially true if you decide to buy a home together.
Home insurance protects against potential costs resulting from damage to or destruction of your property, as well as theft. Mortgage default insurance, mandatory in Canada for down payments between 5% and 19.99%, protects the lender if you default on your payments. But to protect your family’s standard of living in the event of an untimely death, including the ability to make mortgage payments and keep your home, you need life insurance.
When you’re scrutinizing household expenses as a young, healthy couple, purchasing life insurance might not seem like an urgent to-do. But ask yourself this: If you or your partner dies suddenly, would the other person be able to shoulder the entire cost of the mortgage, property taxes, utility bills, and other maintenance and living expenses, on top of paying for an unexpected funeral? What about if one of you becomes critically ill or injured and are unable to work?
If tragedy strikes, life insurance protects your love ones from financial upheaval by paying out a lump sum, called a death benefit, so they’ll be taken care of.
There are three main types of life insurance in Canada. A fourth hybrid option, called mortgage life insurance, may be offered to you by your financial institution when you buy a house. You should discuss your options with a licensed insurance advisor to make sure you have the right coverage for your needs.
This type of policy covers you for a specific period of time (typically between five to 30 years). With term life insurance, your premiums are locked in for the length of your coverage, with options to automatically renew your term, or convert to permanent life insurance later, regardless of your health. It’s an ideal and low-cost way to take care of temporary needs, such as providing for young children or paying off a mortgage.
As the name suggests, this type of insurance covers you for the duration of your life. It’s also more complex. There are several types of permanent insurance, the main ones being whole and universal. Generally speaking, your premiums will be higher than term insurance when you’re younger, but lower when you’re older. Permanent life insurance accumulates cash value over time.
This is typically for people who are middle-aged or older, and is used to cover final expenses. It’s easier to get because some policies have no medical exam and no medical questions asked, though the amount you’re insured for may be less than with other types of insurance.
Mortgage Life Insurance
In the event of your death, this type of insurance will pay off or reduce the outstanding principal on your mortgage. If you have problems getting individual life insurance because of a pre-existing condition or illness, mortgage life insurance might be a good alternative.
However, there are drawbacks: as you pay down your mortgage, your coverage decreases even as your premiums stay the same. If you die, nothing gets paid to your beneficiaries—the benefit goes straight to the financial institution to pay off the outstanding principal on your mortgage. It may be cheaper than other types of life insurance in the short term, but mortgage life insurance becomes more expensive over time.
How much life insurance do you need?
The general rule is five to seven times your annual income, but individuals should take a financial needs analysis that factors in specifics such as:
- The balance remaining on your mortgage
- Any other loans or outstanding debt
- Your assets: stocks, real estate, and savings
- Funeral and burial expenses, plus uninsured medical costs
- The number of survivors that will require financial support
- The number of years those survivors will need financial support
- Your survivors’ specific needs: child-care, education, etc.
The Bottom Line
Everyone thinks “it’ll never happen to us,” until it does—don’t wait until it’s too late. If you’re part of a home-owning couple, and especially if you have children, life insurance ensures the surviving partner can pay off the mortgage and keep the family home.