What Is Mortgage Life Insurance? (2023 Canadian Homeowner Guide)

In This Article

Key takeaways:

  • Mortgage life insurance is an insurance that covers all or some of the remaining balance of your mortgage if you die
  • Payouts can only be put towards your mortgage balance, meaning your loved ones can't use it to cover other financial needs
  • Mortgage life insurance is only risk-assessed post-claim, making them more expensive than most term life insurance policies

What is mortgage life insurance in Canada?

Mortgage life insurance in Canada is a type of coverage that pays out the balance of a mortgage in the event of the insured’s passing. 

It’s offered by banks, mortgage lenders, or independent insurance companies and is a popular choice for about 25% of Canadian parents.

How mortgage life insurance works

With a mortgage life insurance plan, you pay a premium that’s based on your age and the amount of your mortgage. This premium is usually added to your regular mortgage payments. 

Your mortgage balance will be paid off and your family or estate will own the property outright with no other payments required if you pass away.

Mortgage life insurance does provide valuable coverage for the sizable financial burden that is a mortgage, but there are limitations. 

For example, the payout from these policies only covers the balance remaining on the home. That money can’t be used in any other way and doesn’t ever pass through your family’s hands. It goes straight from the insurance company to the mortgage lender.

Types of mortgage life insurance

There are a few types of insurance related to mortgages and home ownership, which can make it confusing to keep track of everything that each policy covers.

There are three key types of insurance options that a homeowner should understand:

  • Mortgage life insurance
  • Mortgage default insurance
  • Homeowner’s insurance

Mortgage life insurance or mortgage protection insurance

Mortgage life insurance is a type of policy that pays off the balance of your mortgage in the event of your or your spouse’s passing (assuming they’re a co-signer on your mortgage).

This type of life insurance isn’t underwritten during the application process, meaning the approval process is easier for people with health concerns or risky lifestyles. Because of this, mortgage life insurance premiums are often higher than standard term life insurance.

Mortgage default insurance

Mortgage default insurance might also be referred to in Canada as CMHC insurance or mortgage loan insurance and is mandatory if your down payment is less than 20 percent.

Mortgage default insurance in Canada is designed to protect the lender in case you’re unable to make mortgage payments. It’s not a financial safety net for your family like mortgage life insurance or term life insurance.

Home insurance or homeowners’ insurance

Home insurance is the coverage that you purchase to cover expenses in the event that your home and your belongings are damaged in a fire, through vandalism, flooding, etc. It can also be called homeowners’ insurance.

Your mortgage company will require you to have home insurance before lending you the money to purchase your property. These policies protect your investment and ensure that you don’t take a big financial hit if your property is damaged.

Term life insurance to cover a mortgage

Another option for covering your mortgage is using a term life insurance policy. With a term policy, you’d choose the amount and length of coverage you need relative to how old you are and how much longer you have on your mortgage. 

The typical term lengths in Canada are 10, 20, or 30 years, with options for coverage amounts ranging from $100,000 to $5,000,000.

Term plans provide both greater coverage and larger payouts—at a cheaper premium—than mortgage life insurance. They’re generally better suited to the average Canadian family’s needs than the alternative.

Here’s how much you could save with term life insurance over a 25-year amortisation period:

cost of term life insurance vs mortgage insurance in canada

Mortgage life insurance features

Here is a list of features of a mortgage life insurance policy.

Is Mortgage Life Insurance Mandatory in Canada?: Chart detailing term vs mortgage life insurance underwriting

Pros and cons of mortgage life insurance

Here are some pros and cons of mortgage life insurance you should consider when weighing your options.

Is mortgage Life Insurance Mandatory in Canada?: Chart detailing term vs mortgage life insurance policy coverage

Real-life example: mortgage life insurance

Mom of Poppy blogger Lauren Sheriff got sucked into a confusing life insurance policy when she got her mortgage. 

Her bank had pushed coverage onto her, without making it clear what exactly she was getting out of her mortgage life insurance.

Lauren, as she writes on her blog, wasn’t happy with the process and wanted life insurance on her own terms. That’s why she cancelled her insurance policy in favour of PolicyMe’s term life insurance.

Next steps: is mortgage life insurance right for you?

  1. Determine whether mortgage life insurance alone will be adequate for your financial solution, or if a term life insurance policy is more suitable
  2. Shop around for both types of policies to gain an understanding of their premium costs and payment options
  3. If term life insurance is your preferred route, decide how much coverage you need to buy, and how long you want the policy to last (Our life insurance calculator can help with this—it will even tell you if you don’t need life insurance at all)
  4. Make a shortlist of insurers you’re interested in reaching out to, and get quotes to compare.
  5. Apply to the one that best meets your needs. If you’re denied, you can try another insurer.
  6. Read carefully and sign your policy!

FAQ: what is mortgage life insurance?

Does life insurance cover a mortgage?

Yes, both whole and term life insurance payouts can be used to cover a mortgage. In both cases, it’s the beneficiary’s decision about whether or not they want to use the payouts from life insurance on a mortgage, or if they’d prefer to use it on something else. Life insurance provides complete flexibility for how, where, and when, the payout money is used.

Can I get mortgage life insurance with my spouse?

Yes, you can get mortgage life insurance with your spouse. Typically, you can insure two co-borrowers under one mortgage life insurance policy. If you both pass away at the same time, the policy pays off the mortgage. If only one of you passes away, coverage continues on the other person.

Do I need homeowners insurance if I have a mortgage?

Yes, in Canada, mortgage lenders will require you to have homeowners insurance before they grant you a mortgage. If your house is damaged or destroyed, home insurance payouts can help cover the repair or replacement costs.

What happens to your mortgage when you die in Canada?

Your mortgage is attached to your home, so when you pass away, the outstanding mortgage balance will go wherever your house goes. This means if your house transfers to your spouse, the responsibility for monthly payments goes to them as well.

Otherwise, your estate will have to pay back the mortgage debt before any assets are inherited by either selling the home or using life insurance proceeds.

Should you cancel life insurance when the mortgage is paid off?

Your mortgage is one of your major expenses and plays a big role in your need for life insurance. But even if it’s paid off, you might have other expenses, like education costs for your kids or a retirement fund for your partner.

So while it’s possible you can cancel your life insurance once your mortgage is paid off, you need to make sure you’re taking the whole financial picture into account.

Laura McKay

COO & Co-Founder

About the Author

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