The Differences Between Mortgage and Term Life Insurance

Mortgage life insurance, sold through the bank or company providing your mortgage, often seems like a good idea at first glance. After all, who doesn’t want their family to be protected from the high costs of paying off a mortgage if something were to happen to them?

It appears many Canadian parents agree: 25 percent of Canadians with kids under 18 have mortgage life insurance. But when comparing mortgage versus term life insurance, term often comes out on top.

Term life insurance can give you the same protection as mortgage life insurance, with more flexibility and at a lower cost. 

We’ll explain the difference between the two types of insurance policies and show you why term life insurance is a better choice for most Canadian families.

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

Both mortgage life insurance and term life insurance can protect your spouse and kids in the unlikely event you pass away. Here are the key differences between these two types of insurance. 

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 the amount of your mortgage. They are usually added onto your monthly payments and stay the same over time, even as your mortgage debt decreases. 

What is term life insurance?

Term life insurance is a type of insurance policy that you can buy through an insurance company. 

You buy a policy for a set term, typically 10, 20, or 30 years. You also choose how much you want to be covered for. People usually base this off their current and future financial obligations, like your mortgage and other debt, as well as the cost of raising your kids and putting them through school. 

This is a key difference between mortgage life insurance and term insurance. With mortgage life insurance, the death benefit is paid to the bank and your family doesn’t ever see the money. 

Learn more about what is term life insurance in our post or watch the video below to learn about how term life is different from mortgage life insurance.

How long do mortgage life insurance and life insurance last?

It takes one look at the amortization period of your mortgage to know that you will have this debt in your life for a long time. You need to make sure your insurance covers you for as long as you need it. 

As another option, you could get a policy to cover you for the next 10 years. In this timeframe, you will have the highest amount of debt still outstanding on your mortgage. Chances are this is also when your kids are young and highly dependent on your income.

Once that 10-year policy is up, you can re-evaluate your needs and get a policy that works best for you at that time. 

What do mortgage life insurance and term life insurance cover?

Use the differences listed below to evaluate how they’d suit your family’s coverage needs

Mortgage life insurance

  • The amount of the mortgage life insurance benefit will be equal to whatever the remaining balance on your mortgage is, which means it decreases over time as you’re paying it off
  • It also can only be used to pay off your mortgage

Term life insurance

  • The amount of your benefit from term life insurance doesn’t change over the course of your policy
  • Money can be used as your family wishes; it can cover the balance on your mortgage, pay for private school, handle medical expenses or go into a retirement fund for your spouse

How much do they cost?

Life insurance is important and worth investing in. That said, you don’t want to overpay for your coverage. Here’s a breakdown of how the cost for mortgage life insurance and life insurance policies are set.  

Take a look at the graph below and it becomes pretty clear that the value of mortgage life insurance goes down over time. Not a great deal, is it? 

Chart detailing the differences between mortgage and term life insurance policy coverage

Cost of mortgage life insurance

The premiums for mortgage life insurance are based on your age and the amount of money that you owe on your mortgage

The older you are, the more expensive they are. 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 take your individual risk into account and so, even if you’re a healthy person without high-risk hobbies, you will likely overpay for insurance if you choose a mortgage life insurance policy.

Definition of underwriting for article about mortgage insurance vs term life insurance that reads: "What is underwriting? It's the process of v erifying your health and lifestyle history to make sure you're eligible for the coverage. The underwriter measures the risk of insuring you through checking if you're of average health for your age. Underwriting makes sure all policies are guaranteed to be paid out, premiums are as low as they can be and covers as many people as possible."

An important note on mortgage life insurance cost: it stays the same, regardless of the amount of your mortgage balance. 

This means that as you pay off your mortgage the death benefit decreases but your premiums stay the same. 

Cost of term life insurance

In contrast to mortgage life insurance, term life insurance is underwritten. 

This means that the company will take into account your individual risk when setting your premiums.

Assuming you’re not a smoker or a skydiver, this means your premiums will be less than the “one size fits all” premiums used with mortgage life insurance. 

When you enter into a term life insurance policy, the premium will stay the same for the length of the term, as will the death benefit. Remember this is different from mortgage life insurance: that premium stays the same for the length of the mortgage, but the benefit gets smaller.  

However, 50% of parents who don’t have life insurance haven’t bought it because they think it’s too expensive, which is an understandable concern because parents juggle a million financial responsibilities. 

The reality is that needless costs in traditional processes have created a perception that life insurance is more expensive than it is. We've cut unnecessary steps and expenses to offer you the most affordable product in Canada, with the same quality of coverage. 

Because with things like daycare, travel and your own future to consider, you don’t want to waste money on insurance you don’t need! 

Mortgage life insurance vs. term life insurance: who gets the money?

This is one of the big differences between mortgage life insurance and term life insurance.

Term life insurance allows your family to use the money in any way they'd like. 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 for them.

Do I need to do a medical exam for mortgage life insurance and term life insurance?

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

Instead, the insurance company assumes everyone has the same risk (high) and charges premiums accordingly. 

Chart detailing rates for mortgage insurance vs term life insurance underwriting

With PolicyMe, you may not require a medical exam, either. Most eligible applicants don’t require additional medical follow-ups. Some folks do need a medical before getting approved, but we make it convenient, quick and easy. And we cover all the costs so you don’t have to.

It’s understandable that some people wish to avoid getting a medical, but the exam saves you a large chunk of change over the course of your policy term.

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

It’s pretty common to move your mortgage from one company to another when your term is up. That’s because you may want to renegotiate the terms of your mortgage and other lenders may have better rates.

The problem is, your mortgage life insurance policy won’t get transferred over to the new company with your mortgage. You’d 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.

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

Do I need mortgage life insurance or term life insurance?

For most families, term life insurance is the best choice because it’s more flexible and usually more affordable. 

For some people though, an existing medical condition 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. 

To learn about different types of mortgages, read our comprehensive guide on Fixed vs Variable Mortgages.

Mortgage life insurance vs. term life insurance: real-life example

Cayleigh and Adam, who own an architectural firm in Calgary, are raising three-year-old twins.

The couple just bought their first house, a three-bedroom bungalow in the neighbourhood Cayleigh grew up in.

Parents holding toddler by the hands for article about the mortgage  vs. term life insurance

Cayleigh and Adam are concerned about the size of their mortgage, especially if something were to happen to one of them. As it stands, they need both of their incomes from the business to make the monthly payments and provide for their twins. 

They’re considering two options: 

Option 1: Buy the mortgage life insurance that’s being sold through their bank. Their premiums will conveniently be added to their mortgage payment. The downside is, as they pay off their mortgage in the coming years their premiums will stay the same, even though the amount that will be paid out to pay off their mortgage is going down. 

Option 2: Buy a 20-year term life insurance policy that covers them for the amortization period of their mortgage. If something happens to one of them during that time and the mortgage is largely paid off, they can use the extra money to fund the twins’ education. 

Realizing they don't need mortgage life insurance, they say “no thank you” to the bank and buy a term life insurance policy. Their PolicyMe premiums are a little under $30/month each, about the same would spend on a dinner out.

We've cut unnecessary steps and expenses to offer the most affordable product in Canada, with the same quality of coverage. You can get an instant quote and apply for coverage on the spot. Get a decision in minutes, not weeks when compared to traditional life insurance providers!

Wanna see for yourself? Check out our handy insurance quote calculator to find out how much money you could save.   

In summary: term life insurance makes sense for most Canadian families

If you have a mortgage and a young family, having some sort of coverage for your mortgage only makes sense.

Because of the flexibility of term life insurance, it makes the most sense for most Canadian families who own homes. 

With mortgage life insurance your premiums stay the same, while the benefit paid out decreases as you pay off your mortgage. Erik Heidebrecht, licensed advisor at PolicyMe, says,

“You’re locked in, it’s expensive, and only covers one thing—your mortgage, not your family.”

Laura McKay

COO & Co-Founder

About the Author

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