Mortgage life insurance vs term life in Canada: Which protects your mortgage better?
Mortgage life insurance vs term life in Canada: see costs, coverage and flexibility for protecting your mortgage, for eligible applicants.
On this page
- Key Takeaways
- What is mortgage life insurance?
- Drawbacks of mortgage life insurance
- How is mortgage life insurance different from term life insurance?
- Cost and affordability: What will you pay?
- Flexibility and portability: Can your coverage move with you?
- Longevity and duration of coverage: How long does protection last?
- Term life insurance for mortgage protection
- Is mortgage life insurance mandatory?
- Does term life cover my mortgage?
- What’s the difference between CMHC mortgage insurance and mortgage life insurance?
- Can I switch from lender mortgage insurance to personal term life?
- Frequently asked questions about the difference between mortgage life insurance and term life insurance
When you buy a home, it is natural to compare mortgage insurance vs term life to protect the balance you owe. Both can address the risk of a premature death during your mortgage years, but they differ in cost, beneficiaries, and flexibility.
You can choose to buy mortgage insurance as an optional product offered by your lender. With mortgage life insurance, the payout goes directly to the bank or mortgage lender, not to your family.
In this guide, you’ll learn how lender-offered mortgage protection works, how personal term coverage compares, how CMHC insurance fits in, and when switching to your own policy is beneficial. Term life insurance is portable and remains in effect regardless of any changes to mortgage lenders, making it a more flexible option.
What is mortgage life insurance?
Mortgage life insurance is a simple mortgage insurance policy that pays off your home mortgage if you die. With this type of coverage, the mortgage lender is the sole beneficiary, meaning they receive the payout rather than your loved ones.
It is a term life policy in which the payout is based on the outstanding balance or mortgage amount at the time of death. Upon the mortgagee’s death, the mortgage lender calculates a payoff amount that includes the outstanding principal plus any mortgage payments in arrears.
The life insurance company then issues a check to the mortgage lender to eliminate the debt.
Drawbacks of mortgage life insurance
The typical mortgage life insurance policy only covers the remaining mortgage balance owed to the bank or mortgage lender. It names the bank or mortgage lender as the only beneficiary on the policy. The heirs or family get no money from the death benefit, so the coverage is minimal and limited to the outstanding balance or remaining mortgage. Additionally, mortgage insurance may not require a medical exam, but claims can be denied due to health issues identified after death.
Mortgage life insurance is more expensive compared to other life insurance policies for what it covers. This is because the premiums are often based on the borrower’s age, health, and loan amount. Additionally, most mortgage life insurance policies have level premiums, meaning the rates will not decrease over time like with other policies.
How is mortgage life insurance different from term life insurance?
Mortgage life insurance is not the same as traditional life insurance. Term life insurance policies are designed to provide financial protection for a specific period, while whole life insurance policies offer lifelong coverage. On the other hand, mortgage life insurance only pays out if you die while you still have a mortgage balance. If you pay off your mortgage before you pass away, your beneficiaries won’t receive a death benefit. Mortgage life insurance is just one type of term life insurance, albeit a very limited type. Although you may be offered a few options, typically, you are pretty limited in what you can purchase. In contrast, term life insurance coverage remains constant throughout the policy term, providing more stability and flexibility.
One specific limitation is the death benefit amount. Since you only insure the mortgage and only name the mortgage provider as the beneficiary, there is no reason to increase coverage. Additionally, if you change mortgage providers, your mortgage life insurance coverage typically ends and you may need to reapply, which can involve additional costs or new underwriting. This is a key difference in the mortgage insurance vs term life insurance comparison, as term life insurance stays with you regardless of your mortgage provider.
Cost and affordability: What will you pay?
When comparing mortgage insurance and term life insurance, understanding the true cost is crucial for Canadian homeowners. Mortgage life insurance premiums are often higher than those for term life insurance, especially if you’re in good health. With mortgage life insurance, the premium is typically bundled into your regular mortgage payments, which can seem convenient. However, these premiums stay the same throughout your mortgage term, even as your mortgage balance decreases and the insurance coverage shrinks.
On the other hand, term life insurance is usually more affordable for healthy individuals because the cost is based on your personal risk factors, such as age, health, and lifestyle. For example, a healthy 35-year-old non-smoking woman might pay just $24.68 per month for a 20-year, $500,000 term life insurance policy, while a comparable mortgage life insurance policy from a bank could cost $67.66 per month. Over the life of your mortgage, this difference can add up to thousands of dollars in savings with term life insurance.
Choosing term life insurance not only helps you protect your mortgage but also allows you to secure broader life insurance coverage for your family, often at a lower cost than mortgage life insurance tied to your lender.
Flexibility and portability: Can your coverage move with you?
Flexibility and portability are key advantages of term life insurance over mortgage life insurance. With term life insurance, you have the freedom to choose your beneficiary, whether it’s your spouse, children, or another loved one. The payout from a term life insurance policy can be used for any purpose, such as paying off the mortgage, covering living expenses, or even funding your child’s education.
Term life insurance is also completely independent of your mortgage lender or financial institution. This means your coverage stays with you, even if you decide to change lenders, refinance, or move to a new home. There’s no need to reapply or worry about losing your insurance if you switch to a different lender.
In contrast, mortgage life insurance is tied directly to your mortgage provider. If you change lenders or pay off your mortgage, your coverage ends, and you may need to reapply for new mortgage insurance, often at a higher cost if your health or age has changed. With term life insurance, you lock in your rates and coverage for the entire term, ensuring continuous protection for your family no matter where life takes you.
Longevity and duration of coverage: How long does protection last?
The duration of your insurance coverage is another important factor to consider. Mortgage life insurance coverage lasts only as long as you have an outstanding mortgage balance. As you pay down your mortgage, the death benefit decreases, but your premiums remain the same. Once your mortgage is paid off or you switch lenders, your mortgage life insurance coverage ends.
Term life insurance offers more control over how long you’re protected. You can choose a policy term that matches your needs, such as 10, 20, or 30 years, and the death benefit remains level throughout the term. This means your loved ones receive the full payout, regardless of how much is left on your mortgage. Some insurance providers also allow you to extend or convert your term life insurance policy at the end of the term, often without a new medical exam, giving you the flexibility to adapt your coverage as your life changes.
When deciding how much coverage and how long you need it, consider your outstanding mortgage balance, the number of dependents you have, and other financial responsibilities. Term life insurance makes it easy to align your insurance coverage with your family’s needs, ensuring they’re protected for as long as necessary.
Term life insurance for mortgage protection
A term life insurance plan is perfect for those who want coverage for a specific period, such as the length of their mortgage. Buying a term life insurance plan is one great way to get life insurance coverage to protect your family by paying off the mortgage if you die. In addition, you can buy a large enough policy to leave them a nest egg in addition to paying off the mortgage. The tax-free lump sum payout from a term life insurance plan can also be used for a child’s education, funeral costs, funeral expenses, or other expenses beyond the mortgage.
Your family can use the tax free payout, which is a lump sum, to pay the mortgage until they decide whether to pay off the mortgage or sell the house. This gives them options that they would not have with a mortgage-only life insurance policy. The tax free lump sum can help a surviving spouse live more comfortably and cover other living expenses or financial needs.
Most people choose term life insurance for mortgage protection because it’s more affordable and allows you to cancel or convert to whole life insurance later on if your needs change.
Is mortgage life insurance mandatory?
No, mortgage life insurance is not mandatory in Canada. You can choose to buy mortgage insurance as an optional product, but you are not required to do so. Lenders may offer it when you apply for a mortgage, but the only required insurance when buying with less than a 20% down payment is CMHC mortgage default insurance, which protects the lender, not you. Homeowners often choose individual term life coverage instead, as it allows flexibility in beneficiary choice and can be cheaper.
Does term life cover my mortgage?
Yes. Term life insurance can cover your mortgage if you set the death benefit high enough to pay off the remaining balance. The key difference is that your beneficiaries, not the lender, decide how to use the payout. They could pay off the mortgage, continue making payments, or use part of the funds for other needs. This flexibility makes term life coverage a more personalized and comprehensive solution than lender-tied mortgage life insurance.
What’s the difference between CMHC mortgage insurance and mortgage life insurance?
CMHC mortgage insurance protects the lender if you default on payments, while mortgage life insurance products are specifically designed to pay off your mortgage balance if you die. CMHC insurance is mandatory for homebuyers with less than 20% down, but it offers no death benefit to your family. Mortgage life insurance products, on the other hand, are optional and provide death coverage only, ensuring your mortgage is paid off in the event of your passing. Many homeowners prefer individual term policies that cover the same amount but provide direct benefits to their families instead of the bank.
Can I switch from lender mortgage insurance to personal term life?
Yes, you can switch from lender mortgage insurance to personal term life coverage at any time. If you change mortgage providers, you may need to reapply for mortgage insurance, which can involve additional costs and underwriting, but term life insurance remains with you regardless of your lender, offering more flexibility. Applying for your own policy typically offers lower premiums, flexible coverage amounts, and the ability to name any beneficiary. You can cancel lender-provided mortgage protection once your term policy is approved and in force. It’s important not to cancel the old coverage until the new one is active to avoid a gap in protection.
Frequently asked questions about the difference between mortgage life insurance and term life insurance
Does term life insurance pay off a mortgage?
Yes, paying off a mortgage is the beneficiary’s choice with term life insurance in the broader sense. However, although mortgage life insurance is also term life insurance, this is a very limited type of term policy.
When you purchase a term policy, the death benefit can be used for whatever purpose the beneficiaries desire.
Is mortgage life insurance a good idea?
Mortgage life insurance can be one way to protect your dependents from losing their homes. In that sense, it is a good idea. However, you can buy a life insurance policy that could pay off the mortgage and offer more flexibility at a lower cost. Some mortgage life insurance policies may not have a medical exam required, while others may require medical tests as part of the application process. It’s important to understand these differences when comparing your options.
Do I need homeowner’s insurance if I have a mortgage?
Yes, mortgage companies generally require that you have homeowner’s insurance. However, mortgage protection insurance is not to be confused with homeowners insurance or private mortgage insurance; these insurance policies are for different purposes.
Homeowner’s insurance, also known as hazard insurance, covers the property insured against natural hazards. If your property incurs damage, the homeowner’s insurance company will do repairs or even rebuild the house if the policy covers the damage. However, it does not pay the mortgage.
Private mortgage insurance will cover the lender in case the borrower defaults. For example, suppose the borrower can’t or refuses to make the payments. In that case, the lender will be covered for a certain portion of the mortgage balance, usually up to 20%. This is not life insurance in any form.
What type of mortgage protection insurance do you need?
You need to be able to protect your dependents in case you die and have a mortgage on your home. You can do so with a term life policy, a permanent life insurance policy, or a whole-life insurance policy. Permanent life insurance offers lifelong coverage and a consistent death benefit, which can be an alternative to term or mortgage life insurance.
In addition to life insurance, you may also want to consider critical illness insurance. Critical illness insurance can help cover your mortgage payments if you become seriously ill and are unable to work, providing an extra layer of financial protection for your family.
As long as there is enough death benefit to pay off the mortgage, it doesn’t matter much what type of insurance it is. However, there are better and less ideal products to achieve the same goal.
Which is better and why: term or mortgage life insurance?
The best option is a term life insurance policy with enough death benefit to pay off your mortgage and provide for your dependents’ needs. For many financial reasons, term life insurance is often more cost-effective than mortgage life insurance, especially if you purchase it early or while in good health, which makes term life insurance more affordable over time.
Buying a mortgage protection insurance policy limits what your heirs can do unnecessarily. You can get a term or permanent policy with equal death benefits at a lower price.
Organizations like Engineers Canada may offer special term life insurance plans tailored for their members, providing additional value and options.
Term life insurance is a flexible solution for Canadian families, allowing them to address a variety of financial needs beyond just mortgage protection.
Protecting your family in the event of your premature death is an important part of planning for the future. Ensuring they will not face hardship due to debts, including their mortgage, will give everyone great peace of mind.
Mortgage life insurance vs term life – Conclusion
Mortgage life insurance offers convenience, but personal term life insurance provides flexibility, control, and long-term value. By choosing your own coverage, you can protect your mortgage while also providing extra funds for your loved ones. To compare your best options, get a personalized life insurance quote with Oneday. Policies are for eligible applicants and subject to underwriting and provincial regulation.
Sources:
FCAC, “Optional mortgage insurance products”
FCAC, “Mortgage life insurance: know your rights”
