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What does mortgage insurance do? Whom does it protect? Do I need it? MUST I have it, in order to be approved by a bank for a mortgage with them?

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    The question is a little ambiguous - there are different kinds of insurance that can relate to mortgages. The two kinds that come to mind are the creditor insurance (pointed out by Randy below) as well as high-ratio mortage loan or PMI insurance. – Chris W. Rea Jan 13 '10 at 23:44
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Mortgage insurance protects a borrower against premature death, disability or both. The technical term is 'creditor insurance.' While it is an important consideration, rarely is it 'required.' Having said that, in some cases a lender may approve a mortgage conditional on having some sort of protection in place, however, they cannot require that you buy said insurance only from them.

With creditor insurance if one of the borrowers dies, the insurance pays off the mortgage in full, assuming all criteria of the insurance have been satisfied. Similarly, if one of the borrowers is unable to work due to disability (definitions of which vary may greatly depending on the lender) then the insurance covers a predetermined amount of the monthly payment (often 100%) for a predetermined amount of time (that too can vary across lenders).

Keep in mind that creditor insurance, while beneficial in some cases, is not necessarily the only option for borrowers. There is value in looking at what options are available on the individual life insurance side. Talking to an advisor will help you make the best choice for you.

Hope that helps and while it's certainly not an exhaustive explanation of the options available, it gives you an overview.

@littlerandy on twitter

  • Welcome! +1, good explanation of creditor insurance. I also agree it's worth looking at life insurance separate from the mortgage: more flexibility, potentially lower cost, and portability. Furthermore, some banks have (at least in Canada) been employing post-claim underwriting ... awful practice: lsminsurance.ca/life-insurance-canada/2009/06/… – Chris W. Rea Jan 13 '10 at 23:48
  • Thanks, Randy! Glad to see you over here. Your answer makes a lot of sense and has clarified for me :) – Nat_Rea Jan 14 '10 at 16:53
  • While this is a good answer for one kind of "mortgage insurance" there are other kinds which work entirely differently. – DJClayworth May 6 '11 at 18:30
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In Canada, mortgage insurance is mandatory by law unless the borrower puts down at least a 20% downpayment. Until April, 2007, it was mandatory with downpayments less than 25%. There's a good writeup at canadabanks.net.

  • You should add that this insurance is to protect the bank against your default, not to protect you. – Chris Cudmore Sep 7 '11 at 13:06
  • The linked article does indeed explain this. – ChrisInEdmonton Sep 7 '11 at 15:21

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