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
Pros Cons Mortgage insurance Easier 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 insurance Lower 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.
This 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.
PolicyMe is an online insurance company that allows Canadians to buy term life insurance in minutes, 100% online, at the most affordable price. The rates average around 10% – 20% lower than other insurers in Canada and the whole assessment process takes 15 minutes. All you have to do is fill out an online application, hit submit, and find out if you’re approved for coverage instantly. No waiting weeks for a decision and most people don’t require a medical exam. This simplified level of service combined with its affordability is one reason why PolicyMe ranks as one of our top dogs.
If you’re not happy with your policy in the first 30 days for any reason, PolicyMe will refund your payment in full. After that, you can cancel your policy at any time with no penalty. PolicyMe is licensed everywhere except Quebec, New Brunswick and Newfoundland. But there are plans to expand to these provinces in the future.
InsuranceHotline.com 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, InsuranceHotline.com will refer you to an independent licensed insurance broker or agent in your area, who can sell you the policy at the quoted rate.
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.