Mortgage Insurance vs Life Insurance Canada: Comparison Guide

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When it comes to mortgage insurance vs life insurance, which is the better choice? 

Term life insurance can give you the same protection as mortgage life insurance, with more flexibility and at a lower cost. Let’s get into the reasons why it’s a better choice for most Canadian families.

Mortgage insurance vs. life insurance: what’s the difference?

So, what is mortgage life insurance and what is term life insurance? Can they protect your spouse and kids in the unlikely event that you pass away? Here are the key differences between these two types of insurance and how they work. 

What is mortgage life insurance?

  • Mortgage life insurance is an optional insurance policy you buy through your bank or mortgage provider that is tied directly to your mortgage.
  • The premiums you pay for mortgage life insurance are based on your age and mortgage amount.
  • The premiums you pay are usually added to your monthly payments and stay the same over time, even as your mortgage debt decreases.
  • If you pass away and there is still a balance on your mortgage, the insurance provider will pay off the amount owing and your family will own the house outright.

What is term life insurance?

  • Term life insurance is a type of policy you can buy through an insurance company.
  • You decide how long you want your policy to last (typically 10, 20 or 30 years) and how much coverage you need.
  • People usually choose their coverage amount based on their current and future financial obligations, such as their mortgage and other debt, as well as the cost of raising their kids and putting them through school.
  • If you pass away, the insurance company pays the coverage amount, also called the death benefit, to your beneficiary, which is usually your spouse or kids.

Watch the video below to learn about how term life insurance is different from mortgage life insurance.

How long do mortgage life insurance and life insurance last?

  • Mortgage life insurance lasts as long as you have outstanding debt on your mortgage. Once it’s paid off, the insurance policy ends.
  • Term life insurance, on the other hand, has flexible timelines. If your amortization period is 20 years, for example, you can get a 20-year policy that will cover you for that time.

In other words, it depends. Mortgage insurance will last as long as you owe money on your home (20 to 30 years), while you can choose how long your term life insurance policy will last.

What do mortgage life insurance and term life insurance cover?

Both mortgage life insurance and term life insurance cover different things. While they both pay out a benefit in the unlikely event that you pass away, there are some key differences.

What mortgage life insurance covers

Mortgage life insurance can only be used to pay off your mortgage. As you pay off your mortgage, the death benefit decreases but your premiums stay the same. 

The amount of your benefit from mortgage life insurance will be equal to whatever the remaining balance on your mortgage is, which means it decreases over time as you’re paying it off.

mortgage insurance vs term life insurance coverage

“With mortgage life insurance, the death benefit is paid to the bank and your family doesn’t ever see the money.“ explains Laura McKay, Certified Life Insurance Advisor and COO and co-founder of PolicyMe.

What term life insurance covers

Term life insurance can be used according to your family's wishes; it can cover the balance on your mortgage, help with funeral expenses, pay for private school, handle medical costs or go into a retirement fund for your spouse.

Term life insurance enables your family to use the money in any way they’d like. For example, they may choose to pay off the mortgage or use the money to pay for a child’s university tuition. It gives your family flexibility to use the money in the way that makes the most sense.

PolicyMe combines flexibility and affordability to offer some of the most competitive rates in Canada, making term life insurance accessible to families of all kinds.

Get a no-obligation quote and start your application in less time than it takes to reheat your leftovers.

Cost of term life insurance vs mortgage insurance

Mortgage life insurance can cost a little over double the amount you'd pay for term life insurance.

  • Like with most types of life insurance, the older you are, the more expensive your premiums will be.
  • The same goes for the mortgage amount; the more you owe, the more they’ll charge you for premiums.

Mortgage life insurance premiums aren’t underwritten, meaning they don’t consider your individual risk. So even if you’re a healthy person without high-risk hobbies, you will likely overpay for insurance if you choose a mortgage insurance policy.

An important note on mortgage life insurance cost: it stays the same, regardless of the amount of your mortgage balance. So you don't pay less as you pay your mortgage down – even though the payout shrinks with every mortgage payment.

Cost of term life insurance

Unlike mortgage life insurance, term life insurance is underwritten; so most Canadians will end up paying much less for term vs mortgage insurance. For example, here's what a 35-year-old non-smoking woman would pay over a 25 year term for $500K in coverage:

cost of term life insurance vs mortgage insurance in canada

The end result: savings of $12,285 over the course of the policy.

Why is term so much more affordable? The insurer considers your individual risk when setting your premiums. Assuming you’re not a smoker or a skydiver, your premiums will cost much less than the “one size fits all” rates used with mortgage life insurance.

When you get a term policy, the premium will stay the same for the length of the term, as will the death benefit.

Do I need a medical exam for mortgage insurance?

A medical exam is not needed for mortgage insurance, making it a type of no medical insurance.

“One of the selling points of mortgage life insurance is that it’s easy to get,” says Laura. “That’s because the policy isn’t based on a health assessment or any evaluation of your individual risk.”

The drawback to this approach? The life insurance company assumes everyone has the same risk (high) and charges premiums accordingly.

mortgage life insurance costs compared to term life insurance

With PolicyMe, you might not even be required to do a medical exam. Many of our eligible applicants don’t require additional medical follow-ups.

Of course, some folks need to do a medical exam before getting approved. But we make it convenient, quick and easy. And we cover all the costs so you don’t have to.

What happens with mortgage insurance and term life insurance if you change mortgage providers?

If you change mortgage providers, your current mortgage insurance policy will end.

It’s common to move your mortgage from one company to another when your term is up, so it’s important to remember your mortgage insurance won’t transfer over.

You’ll have to set up a new mortgage life insurance policy tied to your new mortgage. And since you’ll be older, rates are likely to be higher.

In contrast, because term life insurance isn’t tied to your mortgage, it isn’t affected when you change mortgage providers.

When is mortgage insurance a good idea?

It’s a good idea to have a financial safety net that will pay off your mortgage if you pass away. But that doesn’t necessarily require mortgage insurance. For many families, term life insurance can serve this need and is the better choice. Term policies are more affordable and pay out directly to your beneficiaries, who can use the money for the mortgage or their other needs as they see fit.

For some people, an existing medical condition, like HIV or diabetes, can make it difficult to get term life insurance. If that’s your case, mortgage life insurance might make sense.

Because insurers usually don’t perform detailed health assessments for mortgage life insurance, you’re more likely to get approved. 

Bottom line: term life insurance makes sense for most Canadian families

  • You own a term insurance policy, so you decide who the beneficiary is. With mortgage insurance, the lender is always the beneficiary.
  • It covers more than your mortgage debt from paying off loans to covering unexpected funeral costs and helping your partner maintain the lifestyle you worked so hard to achieve. Our guide to life insurance for couples has more details.
  • Term life insurance premiums stay the same for the length of your term which can be as long as 20 or 30 years.  Mortgage insurance premiums, on the other hand, renew with every new mortgage term. Premiums increase as age (because your risk of getting ill or passing away goes up with age).
  • Your policy isn’t tied to your lender. In a nutshell, this means your insurance will pay off your mortgage regardless of who your lender is.
  • Your death benefit never loses its value for the length of your policy’s term. 

Want to compare term life insurance to other types? See our guide on term versus whole life insurance.

FAQ:Life insurance vs mortgage insurance in Canada

Do I need mortgage insurance if I have life insurance?

In general, you won’t need mortgage insurance if you have a traditional life insurance policy. When you decide how much coverage you need, you’ll usually include your most significant expenses in the calculation, and that’s likely your mortgage.

And while nothing's stopping you from having two policies, paying two monthly premiums can be expensive and unnecessary.

Does mortgage insurance pay a death benefit?

Mortgage insurance pays out the remainder owing on your mortgage if you pass away. So in that sense, it does pay a death benefit. But the money won’t go to your family or beneficiaries. Instead, it goes directly to the bank to cover the balance owed on your home.

If you’re looking for life insurance that will deliver a payout to your loved ones and provide them with financial support after your passing, you will need to purchase a traditional life insurance policy, such as a term life plan.

What happens to life insurance if the mortgage is paid?

Nothing happens to a term life insurance plan if your mortgage is paid off. You’ll continue paying the same premiums, and your death benefit will remain the same. If you pass away after fully paying off your home, your family will have more money for their other needs and living expenses.

In contrast, a mortgage insurance policy ends when the mortgage is paid off. With no active coverage, there’s also no payout if you pass away.

Laura McKay

COO & Co-Founder

About the Author

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