Mortgage life insurance and individual life insurance can help pay off a mortgage if the insured dies. The term “mortgage insurance” can also refer to mortgage-loan insurance, which protects the lender against borrower default and is generally required for eligible mortgages with less than 20% down. Learn more about each below.
To understand the difference between the two, our team reviewed the Financial Consumer Agency of Canada’s optional mortgage-insurance guide, its mortgage-life insurance rights guide, CMHC’s mortgage-loan insurance explanation, and the federal life-insurance guide.
Before deciding, compare options to see what’s included for the same amount of coverage.
Is Personal Life Insurance Or Mortgage Life Insurance Better For A Mortgage?
Personal term life insurance is more flexible. You can choose the beneficiary, and the insured amount does not automatically fall with the mortgage balance.
Your lender may offer mortgage life insurance. Review the details on your mortgage life insurance certificate, get comparable term life insurance rate quotes, and consider your health and your family’s needs to find the best option for you. If you can’t get a personal policy, mortgage life insurance might be a good alternative.
Mortgage Insurance Vs Life Insurance At A Glance
Don’t assume that the policy with the lowest monthly premium is the best. Compare the same starting benefit and term, including the renewal structure and protection period.
Mortgage-loan or default insurance doesn’t pay a death benefit; it protects the lender if a qualifying borrower doesn’t make payments. Optional mortgage life insurance pays the lender the outstanding insured mortgage balance when a claim is approved. Personal life insurance pays a designated beneficiary a specified amount under the policy.
How Mortgage Insurance Helps Your Home Loan
| Product | Who it protects | When it applies | Where a payment goes |
|---|---|---|---|
| Mortgage-loan insurance | The mortgage lender | Mortgage-loan insurance is typically required when purchasing an eligible home with less than 20% down. | Payment goes to the lender if the borrower defaults. |
| Mortgage life insurance | The mortgage lender, by paying the insured balance. | Mortgage life insurance covers death. It may cover other separately purchased risks, subject to the certificate. Read your certificate to find out what is covered. | Payment generally goes to the lender against the outstanding mortgage balance. |
| Personal life insurance | The policyholder and chosen beneficiaries. | Coverage applies when the policy is in force and death occurs in accordance with the policy’s terms. | Payment goes to the named beneficiary, estate, or other payee specified in the policy. |
CMHC describes mortgage-loan insurance as a type of lender insurance. These premiums range from 0.6% to 4.5% of the mortgage amount. The rate varies based on your loan-to-value ratio and other factors. Mortgage-loan insurance is separate from mortgage life insurance, which is optional.
How Life Insurance Helps Your Home Loan
You’re not required to use life insurance payouts to pay off your home loan. Beneficiaries may pay off the loan, replace income, or use the money another way. It is the beneficiary’s decision, not the lender’s.
Which Type Of Life Insurance Is Best For My Mortgage?
Term life insurance typically makes the most sense for temporary needs like paying off mortgage debt and replacing income. Permanent life insurance can make sense when you need lifelong protection or have estate goals. Don’t choose it only because you have a mortgage.
Consider your full protection needs rather than matching coverage only to the mortgage, then choose the policy that best fits those needs.
Also, if you get term life insurance, make sure you know the term length, whether it’s a level-premium policy for the original term, and how much it’ll cost to renew after that. Permanent life insurance often costs more than term insurance for the same death benefit.
Read More: Compare Term and Whole Life Insurance
Comparing Both Options
Who is the beneficiary?
Personal life insurance: You may designate a person, multiple people, or your estate as the beneficiary.
Mortgage life insurance: The beneficiary is usually the mortgage lender.
What Happens to the Benefit?
Personal life insurance: The policy amount generally stays the same unless you change it.
Mortgage life insurance: The benefit typically reflects your remaining insured mortgage balance.
What Happens to the Premium?
Personal life insurance: It depends on the policy and term. Renewing the policy may result in a higher premium.
Mortgage life insurance: According to federal guidance, the premium typically stays the same even as the mortgage balance decreases.
What Evidence Is Required?
Personal life insurance: Depending on the application, you may be asked to provide answers to health questions, medical records, tests, or an exam.
Mortgage life insurance: Application requirements vary. Any later claim review is determined by the terms of the insurance certificate.
Can the Coverage Move With You?
Personal life insurance: The policy is not tied to one lender or one home, as long as you keep it in force.
Mortgage life insurance: Refinancing, obtaining a new mortgage, or changing lenders may affect the coverage.
What Should You Compare?
Personal life insurance: Compare the benefit amount, term, renewal conditions, exclusions, premium, and ownership.
Mortgage life insurance: Compare the starting benefit, declining balance feature, premium, certificate details, cancellation provisions, and portability provisions.
Instead of assuming one option is cheaper than the other, get quotes with the same starting benefits, the same applicant information, the same smoking status, and the same protection period. Then compare total premiums and benefit amounts year by year.
A $500,000 Starting-Benefit Example
Let’s say the starting benefit is $500,000 in either scenario. After several years, the balance drops to $350,000. Assuming your term life insurance hasn’t changed, you’ll still have a payout of $500,000.
Your mortgage-life payout would most likely drop to match the insured mortgage balance (about $350,000), even though the insurance cost would most likely stay the same.
This example doesn’t discuss which option costs more. For that, compare quotes and review the mortgage-life insurance certificate from your lender.
Read More: Compare Level-Term and Decreasing-Term Life Insurance
Which One Is Right For You?
Life Insurance
Life insurance can make sense if your family’s financial needs extend beyond paying off the mortgage. With life insurance, you get to choose the beneficiary. Consider the initial term, renewal premium, and conversion features.
Review your needs periodically, since liabilities and income needs change over time. Ask what financial and medical evidence the insurer requires. Medical examinations aren’t required in all cases.
Mortgage Life Insurance
If a federally regulated bank offers this type of insurance, it must get your agreement before charging for it. Read the insurance certificate to learn:
- who’s eligible and what’s excluded
- limits of coverage
- the claim determination process
- when it can be cancelled
- what happens if you refinance or change lenders
Treat mortgage life insurance as one quote and compare it with your own coverage. Your employer may provide life insurance. Check your insurance policy to see what coverage you have and avoid paying for the same thing twice.
Use This Worksheet Before You Decide
Calculate how much protection your family would need if you died. Include your mortgage and other debts, childcare, education, income, tax, and funeral expenses.
Get quotes for the same amount of protection, and for the same length of time as the mortgage-life insurance. Compare individual term insurance premiums with mortgage-life premiums. Record the benefit and premium at the start, at each term renewal, and after a realistic mortgage paydown.
Before you buy, make sure you have in writing who will receive the benefit, any conditions, exclusions or restrictions, who can cancel the insurance, the evidence requirements, and what happens if you change lenders.
Check that you have the right level of cover after refinancing your mortgage, moving home, changes to your family, or after making large mortgage repayments.
Read More: See What Insurance Records to Update After Paying Off a Mortgage