Is Mortgage Life Insurance Mandatory In Canada?
Is mortgage life insurance mandatory in Canada?
Mortgage life insurance is not mandatory in Canada. However, it is often confused with mortgage default insurance, which is usually mandatory if you put less than 20% down on your mortgage. Here’s how to tell them apart.
Mortgage life insurance:
- Is optional and cannot be required by a lender
- Pays off your mortgage if you pass away
- Names the bank or lender as the beneficiary
Mortgage loan insurance (non-optional if your downpayment is lower than 20%) is issued by mortgage default insurers, like the Canada Mortgage and Housing Corporation. This is not a form of life insurance, and a lender can require that you carry it as a condition of your mortgage. An insured mortgage protects the lender by covering any shortfall if you default on your mortgage and the sale of your property doesn’t completely cover your remaining balance.
Mortgage life insurance is not typically recommended. It doesn’t offer flexible financial protection for your loved ones, and only covers the amount of your mortgage. Unlike traditional term life insurance, which offers a tax-free lump sum payout for named beneficiaries to use as they wish, mortgage protection insurance only provides a payout to your bank or lender.
Mortgage default insurance (CMHC) vs. mortgage life insurance
Mortgage default insurance and mortgage life insurance are often confused. Here are the differences:
Mortgage life insurance is an optional type of life insurance that covers the remainder of your mortgage in the event of your passing. The benefit is paid directly to the lender, helping your family stay in the home without the burden of mortgage payments.
Mortgage default insurance is a mandatory product for homebuyers who put less than 20% down on a property. If you or your family ever default on the loan, this insurance kicks in to pay the lender whatever they’re owed after the property is sold to cover the default. If you pass away, your family is still on the hook for the remainder of the mortgage.
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:
Can a lender require mortgage life insurance?
While a lender cannot make it a requirement to purchase mortgage life insurance as a condition of mortgage approval, be aware that you may be offered a mortgage life insurance policy by the lender. You can decline this optional coverage at any step of the mortgage process. Here are some examples of where the lender may try to sell you mortgage life insurance:
- Pre-approval: Insurance may be presented as a way to “strengthen” your application. Fact: It has no impact on approval.
- Rate-hold or commitment signing: Insurance paperwork may be presented alongside other required documents. Fact: It is never mandatory.
- Final approval or closing: You may be asked to make quick yes/no decisions at closing, including an offer of mortgage life insurance. Fact: You can always decline and purchase it later on your own.
- Renewals or refinancing: You may be offered a policy if your loan terms change or if you previously declined it. Fact: It’s always optional and declining has no impact on rates.
You always have the right to decline it or choose a personal life insurance policy instead, and declining does not affect your approval or interest rate.
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 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, or anything else they need.
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.
Term life insurance sized to your mortgage
To pick the correct term life insurance policy, the first step is aligning the term length with your mortgage duration and amortization period.
Example: Your mortgage has a 25-year mortgage amortization and you have 20 years left = 20-year term life insurance policy
Note that your term length and renewal don’t really matter here, because these only change the interest rate and terms of your repayment — your full debt obligation remains the same.
You can also ladder multiple term policies with different lengths to cover different financial needs. It’s totally legal (and smart!) to carry more than one term life insurance policy.
- 30-year term: Intended to cover the mortgage balance, roughly aligned with a 25 or 30-year amortization period
- 20-year term: Intended to cover income replacement to raise kids, roughly aligned with the 20 years it takes for a child to become financially independent
- 10-year term: Intended to cover a short-term debt like a car loan, roughly aligned with the length of those short-term loans (Tip: 10-year terms are most helpful during peak earning and expense years)
In practice, laddering could mean you have a $500,000 30-year term policy for the mortgage, a $300,000 20-year term policy for the kids, and a $100,000 10-year term policy for short-term debt coverage. That equals $900,000 in coverage right now — and the coverage would naturally shrink over time as your financial risk declines and each term policy expires.
“Term insurance is generally for people who want to have their mortgage covered. If they pass away, they want to make sure that the debt does not fall on the family. Term insurance, 100% is the way to go. If they're a young family and they want to be responsible and look after their kids, term insurance is the way to go. It's going to get you the most coverage and the biggest bang for your buck. Once your kids are all grown up and independent, you don't need to worry about insurance anymore.” – Erik Heidebrecht, Life Insurance Advisor
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 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.
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.
FAQ: Is mortgage insurance mandatory?
Bonnie Stinson is an insurance writer and researcher in Toronto with a decade of experience producing helpful, accurate content for Canadians. They have published resources for some of Canada's most innovative and consumer-trusted companies in the health, legal, and fintech sectors.
Bonnie Stinson is an insurance writer and researcher in Toronto with a decade of experience producing helpful, accurate content for Canadians. They have published resources for some of Canada's most innovative and consumer-trusted companies in the health, legal, and fintech sectors.