You’ve just signed the papers for your new home. Your bank account manager slides one last form across the desk: mortgage life insurance. They explain it will pay off your house if you die, protecting your family. It takes five minutes to sign, the cost is added to your mortgage payment and you’re done.
It sounds responsible. It sounds easy. For many Canadians, it’s worth taking a second look before signing.
While “mortgage insurance” and “life insurance” both pay out when you die, they work very differently in Canada. One is designed primarily to protect the bank. The other is designed to protect your family. This guide breaks down exactly how they differ and why your choice matters.
The Big Confusion in Canada: Mortgage Default vs Mortgage Life Insurance
Before anything else, it helps to separate two products that often get lumped together:
- Mortgage Default Insurance (CMHC and similar):
- Required if you put down less than 20% on your home
- Protects the lender if you stop making payments
- Mandatory in many low down payment situations; you have no choice here
- Mortgage Life Insurance (Creditor Insurance):
- Optional coverage usually sold by your bank or lender
- Pays off your remaining mortgage balance if you die
- This is what the lender offers at signing and what you should compare to personal life insurance
This article focuses on the second type: optional mortgage life insurance versus personal life insurance in Canada.
Mortgage Insurance vs Life Insurance: At a Glance
A simple way to see the differences:
| Feature | Bank Mortgage Life Insurance | Personal Life Insurance (e.g., Term) |
| Beneficiary | Lender (the bank) | You choose (spouse, kids, etc.) |
| Payout amount | Declines as you pay down the mortgage | Stays level for the policy term |
| Premiums | Often stay the same as coverage shrinks | Fixed while coverage stays level |
| Use of funds | Must go to pay off the mortgage | Can pay mortgage, income, childcare, etc. |
| Portability | Usually ends if you switch lenders | Follows you even if you move or refinance |
| Underwriting | Often confirmed at claim time (after death) | Done upfront when you apply |
Now let’s go deeper into each difference.
Who Gets the Money? (Beneficiary)
Mortgage Life Insurance (bank):
- The bank is the beneficiary.
- Your loved ones never receive the payout directly; the money goes straight to paying off the mortgage balance.
Personal Life Insurance:
- You choose the beneficiary. Typically your spouse, children or another loved one.
- They receive a tax free lump sum and can decide how to use it:
- Pay off some or all of the mortgage
- Cover living expenses, childcare or education
- Build an emergency fund or invest for the future
With personal life insurance, you are protecting your family first and not the lender.
How Much is Paid Out? (Declining vs Level Coverage)
Mortgage Life Insurance (bank):
- The coverage is tied to your outstanding mortgage balance.
- As you pay down your mortgage, the coverage shrinks.
- Example:
- Year 1: You owe $500,000 → coverage $500,000
- Year 20: You owe $50,000 → coverage is only $50,000
Personal Life Insurance:
- Coverage is level for the entire term.
- A $500,000 term policy pays $500,000 whether you die in year 1 or year 20, even if your mortgage is almost paid off.
- This means your family can end up with far more protection for similar or lower cost.
What About the Cost?
Mortgage Life Insurance (bank):
- Premiums are usually blended into your mortgage payment.
- The monthly cost often stays the same, even as the coverage amount declines.
- Over time, you may pay the same for $50,000 of coverage as you once did for $500,000.
Personal Life Insurance:
- You choose the coverage amount (for example, enough to cover your mortgage plus income replacement).
- Premiums are fixed for the entire term (e.g., 20 or 25 years) while coverage stays level.
- For many healthy Canadians, personal life insurance often offers more coverage per dollar than lender mortgage insurance.
Portability When You Move or Refinance
Mortgage Life Insurance (bank):
- Coverage is tied to that specific mortgage with that specific lender.
- If you:
- Refinance
- Switch lenders for a better rate
- Move to a new home, your mortgage insurance typically doesn’t move with you.
- You may have to re‑apply, and because you’re older (and your health may have changed), it could be more expensive or harder to get.
Personal Life Insurance:
- The policy is tied to you, not the loan.
- You can:
- Switch banks
- Refinance
- Move homes
- Even become a renter and your life insurance stays exactly the same.
- You don’t need to re‑qualify every time you change lenders.
The “Post Claim Underwriting” Risk
One of the biggest concerns with some bank mortgage insurance products is when they truly assess your health.
Personal Life Insurance:
- Uses pre claim underwriting.
- The insurance company reviews your health, medical history and lifestyle before issuing the policy.
- Once approved and in force, they generally cannot cancel your policy or deny a future claim because your health changes later, as long as you were truthful on the application.
Bank Mortgage Life Insurance:
- Often uses a much lighter screening upfront, just a few health questions.
- In many cases, they do more detailed underwriting after a claim is made (post claim underwriting).
- That means your family may only find out whether you were truly covered after you pass away. If the insurer later finds missing or misunderstood health information from years ago, they can reduce or deny the claim. In some cases, they may deny or reduce the claim and only return the premiums paid.
In simple terms:
- With personal life insurance, the insurer decides “yes or no” before they take your money.
- With some bank mortgage policies, your family only finds out if you were properly covered when they need the money most.
Protect Your Family, Not Just the Mortgage
Choosing between mortgage insurance and personal life insurance in Canada is really about who you want to protect, the bank or your family. Bank mortgage insurance is convenient but coverage usually shrinks over time and the payout is tied to the lender, not your loved ones. Personal life insurance typically offers:
- Level coverage that does not decline with your mortgage
- A tax free lump sum paid to the beneficiaries you choose
- Portability if you move, refinance or change lenders
Before you sign anything at the bank, review any coverage you already have, decide how much protection your family actually needs, and compare quotes from an independent broker so the plan you choose protects your family, not just the mortgage balance.
If you would like help exploring your life insurance options, you can contact Thomas C. Chan for no obligation advice.
FAQ: Common Questions from Canadian Homeowners
Do I need mortgage insurance if I already have life insurance?
If you already have personal life insurance, you may not need separate mortgage life insurance. Many financial professionals suggest first checking whether your existing coverage is enough to:
– Pay off the mortgage
– Cover other debts
– Replace income and support your family’s lifestyle
If the answer is yes, buying an extra lender product often adds cost without much extra benefit.
Do you need life insurance for a mortgage in Canada?
Legally, no.
There is no Canadian law that requires you to have life insurance to qualify for a mortgage. Your lender may strongly recommend their mortgage insurance but you’re allowed to:
– Decline their product
– Use your own personal life insurance instead
– Shop around for independent coverage
Is mortgage insurance mandatory in Canada?
It depends on what type you mean:
– Mortgage default insurance (CMHC or similar) is mandatory if your down payment is below 20% and you meet certain criteria. This protects the lender, not your family.
– Mortgage life insurance from the bank is always optional. You are not required to buy it, even if your down payment is low.
Is mortgage life insurance ever a good idea?
There are situations where bank mortgage insurance can make sense, such as:
– If you are uninsurable or very hard to insure due to serious health conditions
– If you’ve been declined for personal life insurance and still want some form of mortgage payoff protection
Because lender policies sometimes ask fewer health questions, they may be the only available option for certain high risk individuals. For most healthy Canadians, however, personal life insurance tends to offer better long term value and flexibility.
Can I cancel mortgage insurance if I get life insurance?
Often, yes.
Many lenders allow you to cancel their mortgage life insurance if you later obtain your own life insurance policy. If you’re considering this:
– Confirm the cancellation terms with your lender
– Make sure your personal life insurance is approved and active before cancelling the bank’s coverage
– Review your overall coverage amount to make sure your family is fully protected
