Is Mortgage Life Insurance Mandatory In Canada?

We know your lender is probably pushing mortgage life insurance. And most of us don't know what mortgage life insurance is exactly. So let's dig into whether you actually need it or not.

Mortgage life insurance is not mandatory in Canada

Mortgage life insurance is not mandatory in Canada.

While you don't have to have a mortgage life policy, you might want to consider some form of mortgage insurance protection if you have people who depend on you financially.

It's not fun, but it's smart to think about what might happen if you can’t pay your mortgage.

You want to make sure that even in the face of disability, critical illness or premature death, your mortgage is covered. We recommend term life insurance.

Mortgage default insurance is sometimes mandatory in Canada

Mortgage insurance is mandatory in Canada if your down payment is less than 20% of the purchase price of a home.

Mortgage insurance is sometimes called mortgage default insurance or CMHC insurance, since it's issued by the Canada Mortgage and Housing Corporation.

Mortgage default insurance protects your lender in the event you can’t pay; it exists so that lenders can protect their cash flow.

Is mortgage life insurance required to get a mortgage?

The good news is you don’t need life insurance to get a mortgage. 

What life insurance do I need for a mortgage in Canada?

‍Mortgage insurance products provided by your bank or mortgage lender will just pay off debt related to your mortgage.

Your beneficiaries can't use the funds for anything else. Your lender usually will add the mortgage life insurance premiums on top of your regular mortgage payments.

What life insurance do I need for a mortgage in Canada?

You need mortgage life insurance:

1. If you feel like you may have trouble making monthly mortgage payments.
2. If you have pre-existing health conditions.

Insurers usually don't perform detailed health assessments for mortgage life insurance, so you're more likely to get approved. That said, it's best to apply for term life insurance first. If you're approved, you're likely to pay lower monthly premiums.

You need term life insurance:

1. If affordability is a concern. Term life insurance is usually cheaper.
2. If you want more flexibility in how you use the payout.
3. If you think you might switch mortgage providers on day.
4. If you want coverage after your mortgage is paid off.

There are a number of optional mortgage insurance products in Canada, including life, disability and critical illness insurance.

The Financial Consumer Agency of Canada defines them as optional because the lender cannot make you buy any of these products as a condition of getting another service or product from them.

Meaning, a lender can't make you buy mortgage life insurance as a condition of getting a mortgage.

Mortgage life insurance

Purpose: It pays off your balance if you pass away. The money can only be used to pay off your mortgage.

Pros:

• You're more likely to be approved if you have an existing medical condition.
• There are usually no detailed health assessments.
• Dedicated money set aside to pay off your mortgage, if you're worried about making payments.

Cons:

• The payout can only be used to pay off your mortgage.
• The money goes to your lender, not your beneficiaries.
• Generally costs more than term life insurance since there's no detailed health assessment.
• Can't take the policy with you if you switch mortgage providers.
• No financial protection beyond your mortgage.
• Coverage ends once your mortgage is paid off.

Term life insurance

Purpose: Your beneficiaries can use the death benefit for whatever they want, including paying off the mortgage.

Pros:

• A more flexible option.
• Your beneficiaries choose how to spend the death benefit.
• Paid out in a tax-free lump sum. Typically cheaper than mortgage life insurance.
• Your policy stays with you even if you switch mortgage providers.
• Can be used as financial protection for your retirement, the kids' post-secondary education and more.
• Coverage continues even after your mortgage is paid off, if you select a longer term length.

Cons:

• You will have to answer more health questions.
• You may need to do a medical exam.
• You will need to find a life insurance company, as your mortgage lender will not provide this option.

Save up to 20% on term life insurance with PolicyMe

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Mortgage disability insurance

Purpose: Your mortgage payments are covered if you can't work due to illness or injury that results in disability.

About mortgage disability insurance:

• It's usually a combination of several insurance products, including critical illness and disability insurance.
• It's different than standard disability insurance.
• There is usually a list of illnesses or injuries that are and aren't covered.
• Make sure to review the terms and conditions in the insurance certificate so you're clear on what's covered.
• A fee is added to your mortgage.

Mortgage critical illness insurance

Purpose: Can pay for your mortgage when you become critically ill.

About critical illness disability insurance:

• It's usually a combination of several insurance products, including disability, life, job loss and critical illness insurance.
• It's different than standard critical illness insurance.
• There is usually a list of illnesses that are and aren't covered.
• Review the terms and conditions in the insurance certificate so you're clear on what's covered.
• A fee is added to your mortgage.

About critical illness insurance:

• The policyholder chooses how to spend the cash benefit.
• You can use it to cover your mortgage payments if you take time off work.
• The number of conditions covered varies according to the policy.
• Early-stage conditions may be covered, with a partial payout.
• You choose your coverage amount and term length.

Your mortgage provider might upsell critical illness coverage, which sounds great in theory. If you are too sick to work, your mortgage payments get covered.But it’s not that simple; “Most of the larger mortgage providers only cover 4 conditions,” explains Insurance Advisor Erik Heidebrecht.

Traditional mortgage life insurance, bundled with critical illness insurance isn’t a great idea for the average Canadian.

Erik continues: “You’re paying for a more expensive product with less comprehensive coverage and much more stringent payout conditions.”

PolicyMe has some of the lowest term life insurance rates in Canada, so your loved ones can cover the mortgage if you pass away.

Applying can take 20 minutes (or less!) and you can apply for the most comprehensive critical illness coverage — with 44 illnesses and conditions — at the same time.

Job loss insurance

Purpose: Takes care of your monthly mortgage payment when you become unemployed. It's different than the government-provided Employment Insurance (EI).

About job loss insurance:

• The lender makes debt payments on your behalf for a certain period of time.
• Debts can include mortgage, personal loan or credit card payments.
• Usually available as an add-on to mortgages, personal loans, credit cards or disability insurance.
• You typically can only qualify if you have a full-time job.
• The self-employed, retired, unemployed, or those working part time usually won't qualify.

Does the average Canadian need a mortgage life insurance policy?

The truth is ensuring your loved ones have the cash flow to pay for their home ultimately makes financial common sense. 

But while many parents think they need mortgage life insurance to do this, that's often not the case.

To help plan your budget, we’ve put together the dollars and cents to show the difference between the costs of mortgage life insurance and term life insurance. 

Real-world example: Christine 

Meet Christine, a 30-year-old non-smoker with a $300,000 mortgage living in Windsor, Ontario. Here is what she’ll pay for mortgage protection insurance: 

• Approximately $33 at Scotiabank or $39 a month at BMO before tax.
• The costs are the same for both smokers and non-smokers because mortgage insurance policies lump high risk and lower risk people together, making premiums more expensive overall. 
• FYI: Mortgage life insurance coverage declines with every mortgage payment. With an interest rate of 2.34% and monthly mortgage payments, Christine will pay off $8,950 in principal in one year. This means her mortgage life insurance payout will decline to $291,050 (and it will continue to decline year over year) yet her premiums will stay the same. 

Here is what she’ll pay for term life insurance: 

• For a 20-year term, it will cost Christine $15/month with a solution like PolicyMe before tax. 
• With PolicyMe, she’ll never overpay for her premiums and she’ll have more cash flow to spend on tutoring for her 12-year-old.
• FYI: Christine’s premium and payout will remain the same for the length of her policy’s term. 

What happens to life insurance when the mortgage is paid off?

This is why term life insurance is worth it compared to mortgage insurance: because it pays out your family instead of your lender. 

If your loved ones choose to pay off the mortgage, they can keep the remaining death benefit to cover immediate and future costs, from daycare to your little one’s college education.

Curious about how wallet-friendly term life insurance is? We've taken the fuss out of finding an affordable quote with our online life insurance calculator. 

Who might benefit from mortgage life insurance coverage?

Mortgage life insurance isn't necessary. It is the last resort when you can’t qualify for a term life insurance policy due to your medical history. 

The upside to pure mortgage protection is that it can be easier to get approved because there’s no medical exam required, like with a no medical policy. 

Since mortgage insurance doesn’t require a complete picture of an applicant’s health, providers blend rates to accommodate high and low-risk folks.

This means you're paying a higher premium even when you're a non-smoking yoga lover 

Using Christine’s $300,000 mortgage as an example, here’s a snapshot of how rates differ between mortgage insurance and term life insurance: 

In summary: Mortgage life insurance is optional in Canada

Mortgage life insurance may not be a must-have in the eyes of the law but there’s also more to lose if you do get it.

Both the mortgage balance and coverage will decline over time, as you get older the cost will increase, and once the mortgage is paid off, you won’t have any benefit for your loved ones.  

Often couples life insurance is better than mortgage life insurance due to it protecting multiple people and the ability for the payoff to be used in multiple situations.

With term life insurance, there’s less to lose and you’ll win more peace of mind. The coverage and premiums remain the same for term duration. And in the event of your passing, your family—instead of your lender—receives the benefit, which means they’re empowered to use the money where and how they need it most.

That's why term life insurance is ultimately worth it.

Find some of the best life insurance policies in Canada through PolicyMe. Insurance for seniors may also be something worth looking at for those who are older. Use the life insurance premium calculator Canada to get rates you deserve.