This reality is leading an increasing number of homeowners to buy life insurance shortly after receiving the keys. And increasingly, they’re selecting coverage that goes well beyond the remaining mortgage balance. At first glance this may occasionally seem excessive. But a more in-depth look suggests a shift: young Canadians is probably not overinsuring, but are finally insuring themselves properly.
Of course, not every homeowner necessarily needs life insurance—particularly single, no-backs buyers—but for households that depend on multiple incomes, the financial stakes may be much higher.
Why Buying a Home Changes Your Insurance Needs
A mortgage doesn’t just include a high monthly payment; it introduces a brand new level of economic risk. If something were to occur to 1 partner, could the opposite bear the mortgage alone? Would they be forced to sell? Could they maintain the identical way of life?
These are the questions that always arise in relation to home ownership. As Andrew Ostro, CEO and co-founder of PolicyMe says, “The real question is: Would anyone be in serious financial trouble if my income stopped tomorrow?”
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That’s why mortgages are sometimes the trigger for taking out life insurance. But in keeping with Ostro, that should not be the one start line.
“The question everyone should ask themselves is: ‘If I died and my income stopped, would there be anyone who couldn’t really afford their life or their expenses?'” he says. “If the answer is yes, then you definitely need life insurance.”
Are young Canadians “over-insured”? Not quite
Data from PolicyMe shows that Canadians with mortgages purchase significantly more life insurance than Canadians without mortgages, often a whole lot of 1000’s more. Coverage amounts of $1 million have gotten more common amongst homeowners, in comparison with $500,000 for non-homeowners.
Younger buyers particularly are choosing higher insurance earlier.
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This could seem excessive – especially in case your mortgage is smaller than your policy. But this gap shouldn’t be necessarily a mistake.
“There’s a lot more to life insurance than just the mortgage,” says Ostro. “Paying off the mortgage and getting the family out of debt is important, but beyond that, future expenses need to be considered.”
What looks like “overinsurance” is usually only a more realistic representation of what is definitely happening.
What life insurance should actually cover
It’s easy to think about life insurance as a solution to repay your mortgage, but in practice it’s only one piece of the puzzle. A more comprehensive approach looks at the larger picture:
- Income alternative: How a few years wouldn’t it take your household to interchange your income?
- Expenses for youngsters: From child care to education, children represent long-term financial needs
- Partner support: Could your partner maintain your shared lifestyle on their very own?
- Other debts: Lines of credit, automotive loans or other obligations
- Future costs: Tuition fees, savings goals or just time to regulate financially
“The biggest factor is usually children and their future expenses: housing, food, clothing, education and general living expenses until they become financially independent,” says Ostro.
That’s why many advisors suggest an easy rule of thumb: your mortgage balance plus 10 to twenty times your annual income. It’s not exact, however it’s a useful start line.
Ostro also says homeowners shouldn’t assume that their insurance term will line up perfectly with their mortgage repayment. The higher query, he says, is how long someone can be financially depending on your income.
Mortgage Insurance vs. Term Life Insurance
If there’s one common misstep, it’s assumption Mortgage Insurance Your lender’s offer serves its purpose.
