As the concept of bundling financial services continues to gain momentum we are seeing increasingly more lenders start to push mortgage life insurance. This is not to be confused with the high ratio mortgage insurance that is offered through Canada Mortgage and Housing Corporation (CMHC) and GE Capital (that type of insurance protects the bank’s position just in case borrowers do not make their mortgage payments). On the other hand, mortgage life insurance is designed to protect borrowers’ estates against their loss.

Mortgage life insurance is really intended to be quite simple – if you pass away, your mortgage will be paid off. The question becomes – do you really need this coverage? Insurance is essentially a tool that is used to manage the financial risk endured due to uncontrollable events. The whole underlying concept of insurance is that the losses of a few people are shared among many.

If you fill out a mortgage life insurance form with limited health questions and you are the picture of health then your good health (and thus lower probability of dying from health problems) is likely going to fund the less healthy individuals that accept that same four-question policy. In a group coverage plan like this, it is the less healthy individuals that are being subsidized by the healthy ones.

Mortgage life insurance typically pays out the outstanding mortgage balance at the time of your death. This means that the premium you pay to have life insurance on that $240,000 mortgage is still the same premium even after you have paid down your mortgage to $150,000. While you have aged during the time you paid it down, this premium is still likely not a fair reflection of your coverage versus your probability of having to claim.

Finally you have to see what coverage already exists. Many individuals working for companies have substantial coverage to protect loved ones in the event of death. There is little point to being over insured, or paying a premium for the benefit of no one in particular (ie. when you have no dependants).

Always remember that the person selling you the mortgage has a financial interest in having you accept the mortgage life insurance policy. While good financial professionals will recognize that it is more profitable in long run to only set you up in the right products, you still have to be careful of the unscrupulous players just trying to make a fast buck.

Calum Ross is one of Canada’s top ranked mortgage advisors. He has appeared on Canada AM, Investment Television, Report on Business Television, City TV, is an industry speaker and mortgage columnist. He holds both a B.Comm and MBA in Finance.