When a couple purchases a home with a mortgage, a common question is what happens to the mortgage if one of the owners dies before it is paid off?

For some people, this question is first discussed at the bank when the buyers are arranging their mortgage.  Most financial institutions offer mortgage insurance. It works like this: a policy is set up that will pay off the mortgage if the insured dies.  Sounds good?  Think again.

The problem with mortgage insurance is this: most mortgages are blended payments of principal and interest.  Over time, the debt is retired and the mortgage debt shrinks.  Your premiums remain the same but the potential payout shrinks with the underlying mortgage.

Insurance still has a place in your financial plan.  Consider purchasing term life insurance for the face amount of the mortgage.  It sounds like the same thing and costs about the same.   But in the event of death, the term insurance will pay its face amount regardless of how much the mortgage is paid down.

To illustrate the difference, assume that an owner has a mortgage which is paid down by 50%.  If the owner purchased mortgage insurance and died, the payout would pay the amount required to discharge the mortgage, which would be 50% of its face value.  However, if the owner purchased term insurance for the face value of the mortgage, the payout would be double the amount that a mortgage insurance policy would pay.

In the event that you already have mortgage insurance in place, you can always cancel that policy and replace it with term insurance.  It's your money and your decision to make.

-- Valentine Lovekin, Barrister & Solicitor