Life Insurance
Life Insurance Payout in Canada: What Is It and How Does it Work? (2023)
June 1, 2023
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5 minutes
Key takeaways:
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.
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.
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 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 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 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.
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:
Here is a list of features of a mortgage life insurance policy.
Here are some pros and cons of mortgage life insurance you should consider when weighing your options.
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.
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.
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.
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.
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.
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.
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