Mr. Karl Deeter:

The idea behind building a slight replacement into the cost of the mortgage is that if an event occurred that made a person unable to pay, this other insurance would be paying that mortgage, so it would continue to perform like a regular mortgage, rather than going into arrears. Often when people die, the life cover does not actually cover the loan. We have this view that it wipes it out. In fact, one can often have big deficits. For example if one had an arrear, or if the interest rate applied on the insurance policy was 4% but over the life of the loan the actual interest rate was 5%, one does not match the other. Often borrowers go into arrears and it is the one time where someone with a ruined credit history is still mortgageable because one just shows a death certificate and that explains it away. There are many nuances to it, but there are better ways of doing all this stuff that do not involve lending caps or introducing mortgage insurance. All those things are external to sounder credit policy.