Key Takeaways
- For most Canadians, term life insurance with critical illness riders is the most flexible and cost-effective way to get life insurance for mortgage protection.
- Classic mortgage protection insurance pays off your remaining mortgage balance if you die or become disabled before the mortgage ends. But the beneficiary is your mortgage lender, not your family.
- Term life insurance policies in Canada start at $20–$30 per month for most healthy applicants in their 30s.
Quick answer: what’s the best life insurance for mortgage protection?
Term life insurance is typically the best fit to protect your mortgage—and any loved ones who rely on the roof over their heads.
Term life insurance is:
- More flexible
- More affordable
- Protects more than your mortgage
While a mortgage life insurance payout goes to the lender and skips your loved ones, a term life insurance payout goes directly to your beneficiaries. Then, your family can choose to use the money to pay off the mortgage and buy whatever else they need.
What is life insurance for “mortgage protection” in Canada?
When purchasing a house, many Canadians take out a mortgage that is dependent on two incomes. That means if one of the partners was to pass away during the mortgage, it would leave the remaining person (co-borrower) in financial hardship or forced to sell the property.
That’s why many people purchase life insurance when they buy a house—to ensure, no matter what life brings, their loved ones have a protection plan that would deliver e a life insurance payout large enough to pay off the mortgage (or at least a significant chunk of it).
But, what is the best type of life insurance for mortgage protection? Two popular coverage options are:
- Mortgage protection insurance (MPI): Mortgage protection insurance is designed to pay off your outstanding mortgage balance in the event of your death. It’s often called “mortgage life insurance” in some cases. The beneficiary is usually the mortgage broker, not your loved ones. Your mortgage lender may try to sell this to you, or even frame it as mandatory, but it’s not a good fit for the majority of Canadians.
- Term life insurance: The most popular alternative to mortgage protection insurance, term life insurance is a life insurance product that offers a tax-free lump-sum payout to your beneficiaries, which can be made large enough to cover your full mortgage balance and cover any other financial gaps caused by your passing.
Protect your mortgage and your family with affordable, flexible term life insurance from PolicyMe.
Mortgage life insurance vs. term life insurance for mortgage protection
The main differences between mortgage protection insurance and a traditional term life insurance policy for mortgage protection are the size of your death benefit, the flexibility of your coverage, and, most importantly, who the policy pays in the event of your death.
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Issuer
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Lender, bank, or insurance company
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Insurance company
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Death benefit
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Decreases over time to match the mortgage balance
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Remains constant
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Beneficiaries
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Your lender
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Your chosen beneficiaries
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Flexibility of payout
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Rigid; money goes directly to the lender
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Flexible; money can be used for anything the family needs
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Portability
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Coverage likely ends if you refinance your loan
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Coverage stays in place through the term
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Convertibility
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Generally not convertible to permanent life insurance
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Convertible to permanent life insurance
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Who controls the money
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Your lender
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Your chosen beneficiaries
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Typical cost
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$75 to $200 per month
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$20 to $30 per month
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Disability coverage
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Typically available as an add-on or separate product
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Typically available as a separate product
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Critical illness coverage
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Typically available as an add-on or separate product
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Typically available as an add-on or separate product
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Total value over time
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Decreases as you pay off the mortgage
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Stays the same (or may grow, with whole life policies)
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Because mortgage protection insurance pays out less over time while your premiums stay the same, it usually makes more financial sense to buy term life insurance instead. With term life, your beneficiaries receive the full, tax-free lump sum if you pass away during the term. In other words, mortgage protection insurance provides less value for your money than term life insurance.
Know the difference: Mortgage protection vs. mortgage loan insurance
It’s important to understand the difference between mortgage protection insurance (MPI) and mortgage loan insurance, sometimes known as mortgage default insurance. Unlike MPI, which is an optional product for the financial protection of homeowners, mortgage loan insurance protects lenders and is required by the Canadian Mortgage and Housing Corporation (CMHC) for anyone who buys a home with a down payment of less than 20%.
Types of life insurance for mortgage protection
The best type of life insurance for mortgage protection is term life insurance, which covers your finances for a specific number of years that can be matched to the duration of your mortgage.
Term life insurance is one of four types of life insurance coverage you can use to cover the financial risk associated with mortgage payments.
1. Term life insurance
Term life insurance addresses multiple financial needs at once. It can provide coverage for your mortgage, your children’s education, your family’s ongoing living expenses, and even your final expenses such as burial costs. Term lengths vary, but are commonly between 10 and 30 years.
For mortgage protection, choose a term insurance policy that will outlast your mortgage’s amortization period.
Example: If you have 18 years of mortgage payments left, a 20-year term policy is a better option than a 15-year policy or a 25-year policy.
Pros of using term insurance for mortgage protection
- Affordable coverage: Term life insurance is the best value for money of any type of life insurance. Monthly premiums start as low as $20/month for many applicants under 30.
- Lump-sum payment: Term insurance offers a tax-free lump sum to your loved ones to use for anything they need, instead of going directly to your mortgage lender.
- Critical illness coverage: Most life insurance companies offer critical illness insurance either as a standalone policy or as an optional rider added directly to your life insurance plan.
- Customizable coverage: Choose the amount of coverage and that’s the payout amount, forever. The payout doesn’t shrink to match your loan balance over time.
- Portable and convertible: Unlike mortgage insurance, term life insurance sticks with you regardless of where your mortgage is. Plus, it can be converted to a permanent policy if necessary.
Cons of using term life insurance for mortgage protection
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Limited eligibility for those with serious health conditions: While some term life insurance is available with no medical exam, most life insurance companies require some level of underwriting, whether it’s a visit from a nurse with bloodwork or a few health questions, in order to issue a policy.
For more insights, check out PolicyMe’s ranking of the best term life insurance policies for Canadian families.
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2. Term-to-100 (T100) insurance
Term-to-100 (or T100) permanent life insurance is the next best option for mortgage protection. It’s good for families who require lifelong coverage but want the simplicity and affordability of term life insurance.
T100 insurance lasts your entire lifetime, providing a flexible payout that your loved ones can use for anything (from mortgage protection to daily expenses or children’s education).
Pros of using T100 life insurance for mortgage protection
- Cheapest permanent life insurance option: Because T100 doesn’t include an investment component, dividends, or other perks, it’s the cheapest option for Canadians who want lifelong life insurance coverage.
- Ideal for those with permanent dependents: If your children or other dependents will need lifelong care, e.g. for a health condition or disability, the lifelong protection of T100 insurance guarantees a payout upon your death even if your mortgage is already paid.
- Stable coverage: Because it’s not tied to your mortgage, your job, or even a set policy term, T100 life insurance coverage stays with you through a variety of life events and can act as a stable foundation to your financial plans.
Cons of using T100 life insurance for mortgage protection
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Will outlive most mortgages: Unless your mortgage started late in life, you’re likely to pay it off well before your T100 insurance term ends, meaning that you’ll be paying insurance premiums long after your mortgage ends.
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No cash value component: Unlike other permanent life insurance policies, T100 insurance doesn’t include a cash value component and won’t build value over time.
3. Whole life insurance
Whole life insurance can build your death benefit over time via a cash value component that invests a portion of your life insurance premiums.
The cash value growth is its biggest advantage, compared to mortgage protection insurance where the death benefit diminishes over time as your mortgage balance shrinks.
Pros of using whole life insurance for mortgage protection
- Cash value builds over time: A portion of your premiums is invested over time, and this can increase the total lump sum your beneficiaries receive at the end of your policy term.
- Access to cash value: Homeowners may access the life insurance policy’s cash value before death, either through taking out a policy loan, making a cash withdrawal, or surrendering the policy.
- Lifelong coverage: Like T100 insurance, whole life insurance covers you for your entire life, not just the period when your mortgage is active.
Cons of using whole life insurance for mortgage protection
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Most expensive life insurance: Premium rates cost around 5–15x as much as term life insurance, making it one of the most expensive life insurance options on the market.
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More coverage than most families need: Whole life insurance’s combination of lifelong coverage and cash value investment isn’t a straightforward match for families just looking for mortgage protection and can result in policyholders paying for coverage they don’t really need.
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Poor investment returns: Whole life insurance plans typically have limited returns on investment compared with traditional investment accounts.
4. Mortgage protection insurance from your bank
Mortgage life insurance may be offered to you by your bank when you take out a mortgage. This is rarely a cost-effective option and could lead to overpaying for minimal coverage.
Pros of using mortgage protection insurance for mortgage protection
- Direct payment to lender: It is simpler to send the payout directly to your mortgage lender upon your death. If you’re not comfortable entrusting your family members with the responsibility of handling your mortgage after your death, MPI may be a good solution.
- Multiple coverages available: Some life insurance companies may allow policyholders to combine life insurance, critical illness insurance, disability insurance, and job loss insurance in a single mortgage protection policy.n
- Easier to get with health conditions: People with health conditions may have an easier time qualifying for mortgage protection insurance than term life insurance. However, some companies (such as Canada Life) do use health questionnaires and exams in underwriting their mortgage protection policies.
Cons of using mortgage protection insurance for mortgage protection
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Coverage decreases over time: As you make your monthly mortgage payments, the size of the death benefit attached to your mortgage protection insurance will shrink—but your payments remain the same. With life insurance, your death benefit stays the same, effectively increasing the value of your policy as you pay off your debts.
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Risk of doubling up coverage: Mortgage protection insurance only covers one part of your finances. If you also need coverage for dependents, it’s simpler to use a life insurance policy to cover both needs.
How to pick the right insurance for your mortgage
If you’re not sure what type of insurance you need for your mortgage, you may want to work with an insurance advisor to identify the type of policy that’s best for you. You can also consider the following questions:
- How long will your mortgage last? If your mortgage has an amortization period of 10 years or more, a term life insurance policy may be the best protection.
- Do you have other major financial obligations? Debts, dependents, and big financial goals such as paying for your children’s education can all be covered by a life insurance policy; a mortgage protection policy won’t cover these needs.
- Would you rather have your policy pay the lender or your family members? For some, a flexible lump-sum payment to their loved ones is the ideal death benefit; for others, a direct payoff to the financial institution that holds the mortgage is more attractive.
- Does your health disqualify you from many life insurance policies? Another major reason to opt for mortgage protection insurance over life insurance is if your health conditions make it difficult to find affordable life insurance. Look for exclusions and consider disability benefits if you’re concerned.
Get the right coverage for your mortgage with PolicyMe
FAQs: Best life insurance for mortgage protection
It’s important to distinguish between three different products: mortgage loan insurance, mortgage protection insurance, and life insurance. Mortgage loan insurance protects your lender if you default on your loan and is required by Canadian law if you buy a house with a down payment of less than 20%. Mortgage protection insurance and life insurance both protect your family in the event of your death, but mortgage protection insurance does so by paying your lender directly for the remaining loan balance, while other types of life insurance offer a flexible lump sum payout to your loved ones that they can use to deal with your mortgage, other outstanding debts, living expenses, funeral costs, and more.
Term life insurance offers the best protection for mortgages because it can be tailored to the amount and length of your loan. Other life insurance products, like whole or T100 life insurance, extend beyond your mortgage payment term and provide more coverage than you need if your primary concern is making sure your mortgage payments will be covered if you die.
If you’re looking for an insurance policy that will ensure your loved ones aren’t saddled with unmanageable mortgage debt in the event of your death, term life insurance is a better option than mortgage life insurance for most people. Term life insurance pays directly to your loved ones, can cover multiple financial needs, and, above all, won’t diminish in value as you pay off the mortgage.
Life insurance can cover the cost of mortgage payments in the event of your death. A term life insurance policy is typically the most cost-effective way to protect your family’s finances while you have an active mortgage, although some insurance companies also offer a product called mortgage life insurance that provides more limited coverage.
You need enough life insurance to cover your total outstanding balance on the mortgage. Look for a term length that aligns with the remaining amortization period. If you’re choosing term coverage to provide broad protection for your dependents, get enough to pay off the mortgage plus 10x your annual salary.
You can carry both mortgage insurance and life insurance at the same time, however this is usually unnecessary. Life insurance can cover your mortgage balance and whatever expenses your dependents will require, and it’s more affordable than mortgage insurance. But there’s no law against carrying both types of coverage.
