When is Mortgage Life Insurance Worth It? (Updated 2023)
Mortgage life insurance is an insurance policy which protects your mortgage in the event of your death. If the policyholder dies within term limits the insurance provider will pay out directly to the mortgage lender in order to pay off any outstanding balance on a mortgage loan.
Is mortgage life insurance a good replacement for life insurance? Is it worth buying and in what circumstances would it be advantageous to have? Our guide below will take you through these questions and help you decide whether or not it is right for you.
Is mortgage life insurance worth it?
Mortgage life insurance, or mortgage protection insurance, pays off a mortgage in the event of the death of the borrower. Both life insurance companies and banks offer it, but mortgage life insurance policies are a little different than traditional life insurance. You don't choose the beneficiary, instead, the beneficiary is your lender. Should you pass away, they will be paid the remaining balance of your mortgage. This means that you can leave a paid-off home to your loved ones.
Ultimately you may be better off buying another form of life insurance or disability insurance rather than mortgage life insurance.
In certain situations, mortgage life insurance may be the best option. If for example you had a dependent who you wanted to have the house but were unsure would behave sensibly if they received a large cash payout, then it could be a good idea. Another circumstance is if you want to protect your home, but do not qualify for traditional life insurance because of pre-existing medical conditions.
However, even in complicated, specific circumstances, there are other ways of protecting your loved ones. Appointing a trustee over life insurance payouts could be a good option, or writing a policy that means payments are staggered over a period of time instead of arriving all at once.
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Is mortgage life insurance mandatory in Canada?
Mortgage life insurance is not mandatory in Canada.
However, depending on your circumstances your lender may require you to take out the similarly named mortgage default insurance to qualify for a loan. Mortgage default insurance is a separate type of insurance that protects your lender against you failing to make payments. Lenders will often make this a requirement if your deposit or downpayment is 20% or less of the value of the property you are buying.
|Type of Insurance||Mortgage life insurance||Mortgage Default Insurance|
|Who is the beneficiary of the policy?||The lender uses the death benefit to pay off your mortgage||The lender is paid if you default on your mortgage|
|Is it mandatory?||
*if deposit 20% or less
|What happens if I move my mortgage?||Non-transferable. Changing lenders may result in increased premiums||Policy is unaffected|
|Do premiums increase?||Premiums are not fixed||Premiums are fixed|
|Is sales tax applicable?|
You are under no obligation to purchase mortgage life insurance under any circumstances. If a business is pressuring you to buy mortgage life insurance and making it seem like it is mandatory they may be trying to mislead you.
Is mortgage life insurance a good replacement for life insurance?
Mortgage life insurance is not a perfect replacement for life insurance. Traditional term life insurance is often cheaper than mortgage life insurance and gives your dependents more flexibility in the event of your death.
Mortgage life insurance more directly protects your lender rather than your dependents. A payout from mortgage life insurance will go directly to your lender. Your dependents will not be able to use the money to cover living expenses or pay off any other debts. Your family is, however, left with a paid-off home.
Mortgage life insurance does not require the same level of medical information as many life insurance policies. However, if you are concerned that pre-existing conditions or illnesses might disqualify you from term life insurance, you may also consider a no exam life insurance. Not all types of life insurance require extensive medical information. You can read about them in our guide to types of life insurance.
How much does mortgage life insurance cost?
Costs vary from provider to provider, so it is important to do thorough research and ensure you are getting the best deal. Rates can vary between 10 cents to $1.70 per $1,000 of coverage. Though these rates seem cheap it is important to remember that they technically get more expensive over time. That is because you continue to pay the same rate but the amount of coverage you have decreases as you pay off your mortgage.
For example: if you buy a $200,000 house with a 50% deposit you will have a mortgage of $100,000. If you buy mortgage life insurance, let's say they offer you a rate of $1 a month. At first, your $1 gives you $100,000 of coverage - a pretty good deal! After 5 years, however, let's say you have paid off $30,000 of your mortgage. You are still paying $1 a month but now that only gives you $70,000 of coverage.
Good to know
If your lender provides your mortgage life insurance the cost will simply be added to your monthly mortgage repayment.
Who sells mortgage life insurance?
Many lenders in Canada offer mortgage life insurance as an add-on for new homeowners. This can be done either directly through a bank or with an associated insurance company.
Some well-known providers include:
- Canada Life mortgage insurance
- CIBC mortgage life insurance
- Manulife mortgage protection plan
- RBC mortgage life insurance
- Scotiabank mortgage protection insurance
- Sun Life mortgage insurance
- TD mortgage protection insurance
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What are the best alternatives to mortgage life insurance?
Mortgage life insurance is fairly unique in its inflexibility. It does not allow you to adapt to changing life circumstances. More importantly, it does not allow your dependents choices as to how to use the money. You may decide that the most important thing is for your mortgage to be paid off so your family can live in the house. But perhaps, after your death, the priority for your family will be to move to another city. With mortgage life insurance they will not have readily available money to help them navigate this difficult moment.
Equally, mortgage life insurance does not protect you in any way if you are no longer able to make mortgage payments due to sickness or disability. Let's take a look at some other ways to protect your home and your dependents:
- Traditional life insurance is paid directly to a recipient of your choice if you die. The money can be used for daily expenses, funeral costs, mortgage payments or anything they judge to be the priority.
- Critical Illness insurance covers you if you lose income due to sickness or disability.
- Disability insurance is similar to critical illness insurance. It covers loss of income if you are unable to return to work for a long period or permanently.
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