Mortgage Insurance vs. Life Insurance: What Homebuyers Should Know

Chris Redfern

credfern@orrinsurance.net

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Buying a home is exciting — but it also comes with a lot of decisions.

Between mortgage rates, closing costs, home insurance and moving expenses, life insurance can sometimes feel like just another box to check. When arranging a mortgage, many Canadians are offered mortgage life insurance directly through their lender. In fact, a CMHC survey found that 77% of homebuyers were offered mortgage life insurance by their lender.

Mortgage life insurance can provide valuable protection, and for some homeowners it may be a suitable option. But before saying yes, it’s worth understanding how it compares with purchasing an individual life insurance policy through a licensed insurance broker.

The two may sound similar, but there are some important differences.

1. Your coverage doesn’t decrease as your mortgage does

With mortgage life insurance through a lender, the amount that can be paid generally decreases as you pay down your mortgage because the insurance is designed to cover the outstanding mortgage balance.

Imagine you purchase a home today with a $500,000 mortgage.

Years from now, you may have paid that mortgage down to $275,000. If your mortgage life insurance is based on the outstanding balance, approximately $275,000 is what the death benefit has changed to – and your premium likely didn’t come down with it.

With an individual $500,000 term life insurance policy, the death benefit generally remains $500,000 throughout the term, provided the policy remains in force. That difference can become significant over time.

2. Your family receives the money — and decides what to do with it

One of the biggest differences is who receives the life insurance proceeds.

With mortgage life insurance, the lender is generally the beneficiary and the proceeds are used to pay the outstanding mortgage.

With an individual life insurance policy, you choose your beneficiary.

That gives your family flexibility.

Paying off the mortgage may absolutely be their priority. But perhaps keeping some of the mortgage and using the insurance proceeds for other needs makes more sense at the time.

The money could potentially help with:

• Mortgage payments
• Everyday living expenses
• Childcare
• Education
• Other debts
• Final expenses
• Replacing lost household income

The goal isn’t necessarily just to protect the mortgage. It’s to protect the people responsible for paying it.

3. Your insurance isn’t tied to your lender

Canadians don’t necessarily keep the same mortgage lender for 20 or 25 years.

You may switch lenders at renewal to obtain a better rate, refinance your mortgage, sell your home or purchase another property.

Mortgage life insurance is tied to the mortgage and lender, so changing your mortgage arrangements can affect the coverage and may require new coverage.

An individually owned life insurance policy is different.

Your policy belongs to you — not your mortgage.

If you move your mortgage from one financial institution to another, your individual policy can remain in place, provided you continue paying the premiums and meet the terms of the policy.

This can be particularly important if your health changes.

Someone who qualified for life insurance at age 35 may have very different health circumstances at age 45. Having coverage that isn’t dependent on where your mortgage is held can provide valuable stability.

4. Your death benefit can stay level while your premium is guaranteed for the term

With an individual level term life insurance policy, both the premium and death benefit can generally be guaranteed for the selected term.

For example, someone purchasing a 20-year term policy could know exactly what their premium will be and how much their beneficiaries would receive throughout those 20 years, assuming the policy remains in force.

This doesn’t automatically make one product right and the other wrong. It simply means homeowners should understand what they’re paying for today and what that coverage may look like 10 or 15 years from now.

5. An insurance broker can shop the market for you

Perhaps the biggest advantage of speaking with an independent life insurance broker is choice.

Rather than considering a single insurance option alongside your mortgage, a broker can review your needs and compare coverage and pricing from multiple insurance companies.

And the conversation shouldn’t simply be:

“How much is your mortgage?”

A proper life insurance discussion should consider the bigger picture.

If your family lost your income tomorrow, would paying off the mortgage be enough? What about income replacement, childcare, education savings, other debts and ongoing household expenses?

For context, Canadian households have an average of approximately $442,000 of life insurance protection, according to figures cited by Canada Life from the Canadian Life and Health Insurance Association.

The right amount, however, is different for every family.

Mortgage life insurance can be convenient, straightforward and provide important protection. Depending on someone’s circumstances, it may be a perfectly reasonable solution.

The concern is purchasing it simply because it’s offered during the mortgage process without comparing it to the alternatives.

Even the Financial Consumer Agency of Canada notes that term or permanent life insurance may provide better value than mortgage life insurance, pointing out that personal life insurance maintains its death benefit and allows beneficiaries to decide how the money is used.

Buying a home is one of the largest financial commitments most Canadians will ever make. Taking a little extra time to understand how you’re protecting that commitment — and your family — is worthwhile.

Before checking the mortgage insurance box, ask a few questions.

How much coverage does my family actually need?

Will my coverage decrease over time?

Who receives the money if I die?

What happens if I change mortgage lenders?

Could an individual life insurance policy provide more flexibility?

And most importantly:

Have I compared my options?

An independent insurance broker can help answer those questions, compare solutions from multiple insurers and determine what type of coverage makes the most sense for you and your family.

Because ultimately, you’re not just protecting your mortgage.

You’re protecting the people who call that house home.

Sources:

CMHC – 2019 Mortgage Consumer Survey Results: 2019 CMHC Mortgage Consumer Survey

CMHC – 2021 Mortgage Consumer Survey Results: 2021 CMHC Mortgage Consumer Survey

Financial Consumer Agency of Canada – Mortgage Life Insurance: Mortgage life insurance: know your rights

FCAC – Choosing a Mortgage: Choosing a mortgage that’s right for you