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There are few financial tasks more daunting than taking out or renewing a mortgage.

Seeing that six-figure debt in black and white—and knowing you would lose your home if you were unable to make your payments—can be terrifying. So, when your lender asks if you’re interested in purchasing its mortgage life insurance, it may sound like an excellent idea. But is it?

The answer isn’t as straightforward as you might think and requires a comparison with alternative types of coverage, such as term life insurance. To help you make the correct choice, we’ve looked at mortgage insurance vs life insurance and the reasons why the latter is often the superior option.

What Is Mortgage Life Insurance?

Mortgage life insurance—or mortgage insurance, as it’s more commonly known—is a type of group insurance sold to homeowners by their mortgage lenders (such as banks or other financial institutions) or mortgage brokers.

If the homeowner dies before paying off the mortgage, the lender will receive a payout equal to the outstanding mortgage balance. That means the surviving family members will own the home free and clear, and won’t have to worry about making future mortgage payments or finding a new place to live.

Mortgage life insurance should not be confused with mortgage loan insurance, which is mandatory if you buy a home with a down payment that’s less than 20% of the selling price. Purchased from a public mortgage insurer, such as the Canada Mortgage and Housing Corporation (CMHC), mortgage loan insurance protects lenders against losses if you default on your payments.

Do You Need Mortgage Life Insurance?

Mortgage life insurance in Canada is not required for all mortgage holders, as opposed to the way that third-party liability auto insurance is required for all drivers. Moreover, if your mortgage is small, or you and your spouse each have incomes substantial enough to cover the mortgage payments on their own, there may be no reason to consider mortgage life insurance.

If that’s not the case, then it’s clear you need some kind of life insurance coverage to protect your family from losing the home if you die, but term life insurance is often a cheaper and more flexible option than mortgage life insurance, as detailed below.

Mortgage Insurance vs Life Insurance

While both mortgage insurance and life insurance can provide financial assistance to your loved ones if you die, there are some significant differences between the two products.

  • Premiums: The premiums, or monthly payments, for term life insurance are generally lower than for the same coverage of mortgage life insurance.
  • Term: The term, or period of coverage, for mortgage insurance ends whenever you pay down the mortgage. Life insurance, however, can be for any term you choose, from five years to life.
  • Coverage: The dollar amount that would be paid out by mortgage insurance if you die is equal to your mortgage balance. So, as you pay off your mortgage over time, that potential payout decreases. That’s not the case with life insurance. You choose a coverage amount and it stays the same for the entire term.

So, for example, if you take out a 25-year mortgage of $500,000 when you purchase your home and die 20 years later with $125,000 outstanding on that home loan, mortgage life insurance will pay $125,000. A 20-year term life policy with $500,000 in coverage, on the other hand, will pay out $500,000 regardless of the size of your mortgage balance.

  • Beneficiaries: Your lender is the beneficiary when you purchase mortgage life insurance. That means your loved ones do not receive any cash when you die. Instead, the outstanding mortgage balance is paid directly to the financial institution that issued your home loan. With term life insurance, you name the beneficiaries yourself—a spouse, children, parents or anyone else—and they receive a tax-free death benefit to use for any purpose they choose, not just for paying off the mortgage.
  • Qualification process. Mortgage insurance can be easier to qualify for and does not typically involve medical tests that are usually required to be approved for life insurance. (Although due to the distancing measures imposed by COVID-19, some life insurers are forgoing blood and urine tests for the time being.) Having said that, if you have a pre-existing health condition that you do not disclose before being approved for mortgage insurance, your claim could be denied even if you die during the coverage period.

Pros and Cons: Mortgage Insurance vs Life Insurance

 ProsCons
Mortgage insuranceEasier to qualify for than life insurance

Your home will be paid for if you die

Usually has a 30-day cancellation period where premiums can be refunded
Premiums tend to be higher than term life insurance

The coverage decreases over time, as you pay off your mortgage

Your loved ones do not receive a death benefit
Term life insuranceLower premiums

Coverage stays the same regardless of mortgage balance

Your loved ones receive a lump-sum tax-free death benefit  they can use for any purpose
Harder to qualify for than mortgage insurance

 

 

 

Where To Get Term Life Insurance

Generally speaking, getting life insurance instead of mortgage insurance is the better option for most Canadians. It’s more affordable and you can get a comprehensive policy that’s ample enough to wipe out your mortgage if you should pass away.

There are three basic ways to buy life insurance in Canada. One is to purchase coverage directly from a life insurance company, but then you are limited to the policies and premiums offered by that one provider only. Another is to consult a licensed broker who can sell you a policy from one of several different insurance companies and help you make a selection.

But if you prefer to compare policies and quotes from many life insurance providers at once to get the best deal, we recommend using one of the following online search platforms.

PolicyAdvisor.com

PolicyAdvisorThis independent insurance advisor provides advice by phone, email, live chat and through its online check-up tool and coverage calculator. It allows you to view, save and compare policy details side-by-side, as well as apply for coverage online. For those looking at term life insurance as a replacement for mortgage life insurance, PolicyAdvisor.com has partnered with Canada’s 16 best insurers to provide a unique product called mortgage protection insurance. It’s essentially a term life policy that matches the length of your mortgage amortization period and provides coverage equal to the full amount of your mortgage.

Currently, PolicyAdvisor.com is only available in Ontario, Alberta, and Manitoba, but the company plans to expand to other provinces in the near future.

Learn more about PolicyAdvisor.com


PolicyMe

PolicyMePolicyMe logo is an online licensed insurance brokerage that sells policies from the top half-dozen insurance companies in Canada. You can consult with its on-staff sales advisors (who are salaried, not paid by commission) by phone or email, or use the service’s online calculator to help you determine your term life insurance coverage needs and submit your application online. PolicyMe starts every new customer off with a 5-minute life insurance “checkup” — just fill out an online questionnaire, and in minutes, you’ll get a detailed assessment of your life insurance needs and personalized advice on the type and amount of coverage to get. This highly detailed and customized level of service is one reason why PolicyMe ranks as one of our top dogs.

Learn more about PolicyMe


Kanetix

210x100_kanetix-logoThere’s a reason Kanetix is so popular. This online platform lets you search for rates from more than 50 top insurance providers in Canada, and has an intelligent “compare this rate” tool that sets up a table of three quotes and coverage details for you to easily assess the options available. If you decide to purchase a policy, Kanetix will connect you to the specific insurance company so you can secure your selected rate. If you need assistance, you can search Kanetix’s knowledge centre for answers to common questions, or post a question on its online forum to get in-depth advice from fellow customers.

Learn more about Kanetix


InsuranceHotline.com

InsuranceHotline.com210x100_InsuranceHotline provides quotes from more than 30 insurance companies in Canada in a single search. This five-star rated search platform makes finding a policy a cinch — just fill out an online application and then get access to competitive rates from top insurance providers in Canada. Life insurance policies start as low as $12/month, and if you decide to purchase coverage, the site will refer you to an independent licensed insurance broker or agent in your area, who can sell you the policy at the quoted rate.

Learn more about Insurance Hotline

Last Word 

Nobody wants to leave their loved ones behind with severe financial hardships—such as losing the family home. So, purchasing insurance to provide for them in the unlikely event of your death is prudent. In most cases, however, buying mortgage insurance from your lender is not.

Term life insurance is usually a better option, as it is often more affordable than mortgage life insurance, and it offers more flexibility by paying out a tax-free death benefit directly to your beneficiaries, rather than to your lender.

Regardless of what you choose, everyone needs insurance and it’s important to make sure you’re covered.

Get $20 off any Willful plan with YOUNGANDTHRIFTY promo code!

Article comments

10 comments
ol fuddy duddy !! says:

A very good article ! Comments are even better, every day you learn something new. Thanks to Mr. Fiscally fit for give such accurate info !! Luv your blog site Mr. TM keep up the good work !

Kyle says:

Thanks Ol Fuddy Duddy (sweet moniker btw) we appreciate the comment!

Fiscally fit says:

The majority of creditor/mortgage insurance has postmortem underwriting. The couple questions when you sign simply qualify you to pay premium. The certainty that it would pay out is not high enough to warrant purchase in any scenario. Group life insurance also has a level of certainty that does not rival a fully underwritten personally owned policy. As a certificate holder, not an owner, you do not have the same rights as an owner. Again, the level of certainty when including it in your financial plan is not high enough to rely on.
Bottom line, take advantage of the group insurance as it is the most cost effective coverage you can get (usually) but don’t for a second think it can replace a personally held/owned policy.

Ray says:

Well I like to be a devil’s advocate and also because I am an Actuary, I would like to point something out.

You are Young and Thrifty, and Healthy (emphasis added). Although it may be true that you can get term for cheap compared to mortgage life, it may not hold true for everyone. Everyone who qualifies to buy a house, doesn’t necessarily quality for a term insurance because of underwriting and may not qualify in a preferred category that lowers your monthly premium. On the other hand, almost anyone who buys a mortgage WILL qualify for the mortgage life insurance and tends to have higher mortality experience compared to term life because underwriting standards are usually much lower, if any.

So companies have to price in that uncertainty and mortgage life has other options available to them like guaranteed approval if you buy a bigger house. Plus some people may take a lot of money out of mortgage just before they get sick so that they can get a bigger payout.

Plus, if you are paying a level premium, it doesn’t mean that you are overpaying as your coverage is decreasing as time passes. This assumption is already built into company’s model when coming up with that premium.

And yes if you are healthy, it is better to look somewhere else, but if you are not too healthy, it may actually be a good option ( for 10-15% of the people).

Just my opinion, and I am not a sales person so don’t bash on my post but just to give you other point of view.

Teacher Man says:

This is a good point Ray. I respect the fact that as an actuary you almost certainly have better command of the relevant numbers and statistics, and you’re right – there are a select few situations where mortgage insurance might actually make sense. I would argue you’d have to have some pretty negative short term outlooks for it to make sense (in more like 2-5% of cases would be my guess), but the scenario you put out there is one I hadn’t really considered. Perhaps I’ll do a write up on that one at some point in the near future. That being said though, we both know that mortgage insurance is not sold a niche product to protect the people you mention, instead, it is a high margin product that produces a big fat profit for financial companies and is pushed on a lot of people who would be better of elsewhere.

fiscally fit says:

@ Ray

Well Put. MY only issue is when you say that they will qualify for mortgage life insurance, they simply qualify to pay premiums… they are not actually covered. The underwriting occurs post-mortem in which it is then that they determine if you are eligible for the coverage. If not, then they will simply reimburse the premiums that you paid over the last term. If you could not qualify for basic term insurance, you would definitely not qualify for the mortgage insurance. If you are not healthy, mortgage insurance (that does not go through a detailed health questionnaire that may include blood/urine analysis) through your lender is a waste of money. Your best bet is to simply apply for fully underwritten life insurance and find out… instead of just guessing.

This is the main reason that an individual does not need to complete the LLQP (life license) to offer or sell the product. If you are healthy enough to actually have the mortgage insurance pay out, you should be applying for insurance that actually has some certainty that it will pay out if you die.

PS Great topic TM

Teacher Man says:

This is why I love this blog, I write an article thinking that I’ve researched just about every angle, and then I get a couple of experts on the comments that can teach me and the other readers out there even more!

Fiscally fit says:

just for clarification, you do not own your group life insurance, you are simply a certificate holder. But either way it is always pennies on the dollar.

Sandi says:

As a former banker, I can even tell you that every single credit product sold was scrutinized by management for add-on sales like life and disability insurance. Just selling a mortgage wasn’t good enough, and just selling naked mortgages, loans, and lines of credit (oh, and credit cards, let’s not forget them) on a consistent basis meant many coaching and review meetings, suggested scripts, and “objection handling” seminars.

Teacher Man says:

Wow… so pretty much every “salesman” scenario that one would imagine.