Is Mortgage Life Insurance Mandatory In Canada?
Is mortgage life insurance mandatory in Canada?
Mortgage life insurance is not mandatory in Canada. It is an optional type of insurance that pays off your remaining mortgage balance if you pass away. The beneficiary of a mortgage life insurance policy is the bank or mortgage lender, not your loved ones.
Do I need any insurance to get a mortgage?
Mortgage life insurance is never mandatory. However, mortgage insurance (a different type of insurance) is mandatory in Canada if your down payment is less than 20% of the home’s purchase price. It protects your lender by covering the shortfall if you default on your mortgage and the sale of your home doesn’t completely cover your remaining balance.
This type of mandatory insurance is often called mortgage default insurance or CMHC insurance, since it's issued by the Canada Mortgage and Housing Corporation. It is not a form of life insurance.
How mortgage insurance works
Mortgage life insurance is typically marketed as an affordable product that protects your estate by offsetting the financial burden of your mortgage balance if you pass away. It is usually sold by banks, mortgage lenders or brokers when you take out a mortgage, and premiums are added to your monthly payments.
While it may seem like a safe way to financially protect your loved ones and ensure your mortgage is paid off, it has some major drawbacks:
Mortgage insurance vs. term insurance: Why term is the better pick
Mortgage life insurance only covers your mortgage and the payout goes directly to your bank or lender if you pass, whereas term life insurance offers a tax-free lump sum payout for your named beneficiaries, which can be used however they see fit.
With term life insurance, your beneficiaries can use the death benefit to pay off your mortgage, cover final expenses, save for your children’s education, replace lost income, and much more.
Besides payout usage flexibility, there are a few other key differences between these two types of policies that make term life insurance the better choice for homeowners:
Bottom line: Term life insurance can provide you with peace of mind and flexible, affordable insurance coverage. Many insurance companies, like PolicyMe, offer customizable plans to help you get the most value from your term coverage during the years you need it most. With PolicyMe, the quoting and application process is completely digital, helping you secure your term life insurance policy without unnecessary paperwork or delays.
Mortgage default insurance (CMHC) vs. mortgage life insurance
Mortgage default insurance and mortgage life insurance are often misinterpreted as the same thing. However, mortgage default insurance, also known as mortgage loan insurance or CMHC insurance, is a mandatory product for homebuyers who put less than 20% down on a property, and mortgage life insurance is an optional policy type for those who want coverage for their mortgage loan in case they pass.
Both of these mortgage insurance products protect the lender or financial institution rather than the borrower, but there are distinct elements that set them apart. Here’s an overview of the key differences between these two types of mortgage insurance:
Is mortgage life insurance ever a good idea?
Mortgage life insurance typically isn’t a good idea for most Canadians. It offers limited financial protection compared to a term life insurance policy, and it can be expensive.
Mortgage life insurance scams to look out for
Many legitimate companies send mail, emails, and call new or first-time homebuyers to pitch mortgage life insurance, but there are also a slew of scammers in the mix.
The first sign of a mortgage life insurance scam? Anyone who tells you it's mandatory. Mortgage life insurance is optional, and anyone who says otherwise is either trying to scam you or they’re misinformed (in which case, they shouldn’t be trusted either).
Other warning signs of a scam include:
- Pressuring you to purchase without giving you time to review the offer
- Telling you it’s urgent that you sign off because you’re “already behind on payments”
- Asking for sensitive information (e.g. your banking or SIN details) over the phone or through email
- Insisting that mortgage life insurance is tied to your mortgage contract or government-mandated
To avoid these scams, be sure to speak with your mortgage broker, lender, or bank if you are asked to buy mortgage life insurance by a third-party company. They can help you verify the legitimacy of the insurance product and answer any questions you may have.
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Our mission is to empower Canadians to make informed financial decisions. To achieve this, we have an expert editorial team that includes licensed insurance advisors and financial planners. We prioritize the best interests of Canadian families and won't endorse any product, company or financial strategy that we believe isn't suitable. Our educational guides are crafted by in-house experts, like licensed life insurance advisors. Before publication, we subject our research and advice to scrutiny and comprehensive revisions for accuracy and completeness.
Our mission is to empower Canadians to make informed financial decisions. To achieve this, we have an expert editorial team that includes licensed insurance advisors and financial planners. We prioritize the best interests of Canadian families and won't endorse any product, company or financial strategy that we believe isn't suitable. Our educational guides are crafted by in-house experts, like licensed life insurance advisors. Before publication, we subject our research and advice to scrutiny and comprehensive revisions for accuracy and completeness.