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What is mortgage life insurance?
Mortgage life insurance, often referred to as mortgage protection insurance, is an optional product that’s designed to protect the homebuyer and their family.
This type of insurance covers your remaining mortgage balance in case you pass away before the mortgage is paid off. There are also mortgage life insurance products that will only pay off a specific portion, rather than the full remaining amount.
Insurance is an important part of the home-buying process in Canada. But what’s the difference between mortgage protection life insurance and traditional term life insurance? We’re glad you asked.
How does mortgage insurance compare to traditional life insurance?
Here’s a quick comparison of mortgage insurance and traditional term life insurance:
Both term life and mortgage life insurance pay out in case of your death. But let’s break down the differences further.
Coverage & Premiums
The biggest difference between the two types of insurance is the way that coverage and premiums work.
Mortgage life insurance coverage is tied directly to your outstanding mortgage balance. As you pay down the mortgage, your coverage declines with it, eventually ending when your balance reaches zero. There’s no option to increase the coverage beyond what you owe on your home to cover any other expenses or debts. Your monthly premium stays the same for the duration of the policy, even as your coverage declines.
Term life insurance premiums also stay the same through the length of the policy, but the coverage amount you choose does not decrease over time. Your loved ones have a consistent financial safety net to depend on, and you’re not paying for a policy that loses value. You can also choose to reduce the amount of term life coverage you have as your mortgage balance decreases. If you reduce your term life coverage, your monthly premium goes down accordingly, ensuring the price you pay is always in line with the protection you have.
The price difference between mortgage life insurance and term life insurance can be significant. For many Canadians, term life insurance can be a more financially sensible and affordable option, especially if you apply when you are younger and in good health.
Beneficiary & Flexibility
Let’s start with who is protected. With mortgage life insurance, the payout goes straight to your lender to put towards the remaining balance of your mortgage. While this frees your loved ones from mortgage payments, they never receive any of the funds directly.
With term life insurance, the tax-free lump sum is paid to your chosen beneficiary. Your loved ones can choose how to use the funds in the way that best supports them as they adjust to life without you. For many families, this may include paying off the mortgage. But it could also mean covering other financial obligations, like funeral costs, childcare, or other living expenses.
Portability
Portability is another crucial factor. If your mortgage insurance is through a bank or lender, the coverage typically ends automatically if you switch to a different financial institution. To get new coverage, you would have to re-apply based on your age and health at that time. As premiums typically increase with age, your costs may go up.
The upside of term life insurance is that it’s separate from your home. Your policy follows you no matter how many times you move or change lenders. Term life insurance allows you to stay insured, without any gaps in coverage, and with competitive rates locked in for the entire term.
Application Process
The application for mortgage life insurance is designed to be convenient, often requiring just a few simple health questions. If your answers don't raise any concerns, approval is quick.
Blue Cross Life also makes the term life insurance application process convenient. You can get an instant quote online with just a few clicks. It takes less than 20 minutes to complete your application and you can complete the process without leaving your house. Most eligible applicants are approved right away.
Does life insurance cover mortgage protection?
Yes, term life insurance can cover your mortgage. If you pass away during the term, your beneficiaries receive a tax-free lump-sum payout, also known as a death benefit. The money gives your loved ones the ability to cover any financial obligations, whether that’s a mortgage or other debts and expenses. This flexibility is one of the biggest benefits of term life insurance.
If you want to ensure that your term life policy provides complete mortgage protection, you can choose a coverage amount large enough to pay off your mortgage in full. As a starting point, Canadian financial experts recommend a coverage amount that is 7-10x your annual salary. The right amount for you will depend on your specific financial responsibilities, number of dependents, and existing savings.
What type of life insurance is best for mortgage protection?
The best type of life insurance to protect your mortgage will depend on your unique situation. Some Canadians choose mortgage life insurance for the convenience of bundling premiums with their mortgage payments, or to guarantee that the payout goes directly to paying off the mortgage.
But mortgage life insurance only alleviates the financial burden of your mortgage. While that’s typically a significant financial responsibility for many Canadian families, it’s often not the only one. Mortgage life insurance wouldn’t cover other homeownership costs like property taxes or repairs, nor would it cover other debts and expenses like car payments or childcare. If your loved ones need additional funds to cover other financial obligations, they may be forced to sell or refinance your home. Term life insurance, by contrast, can offer your loved ones mortgage protection and then some.
Bottom line: Term life insurance can address all your life insurance needs in one policy. However, if you have mortgage life insurance, you may still need additional life insurance coverage to provide your family with the protection they need.
Do you still need term life insurance if you have mortgage insurance?
You may still benefit from an additional term life insurance policy if:
- Your outstanding mortgage balance is higher than your life insurance coverage amount.
- Your mortgage amortization period is longer than your life insurance policy term.
- Your total financial obligations, including your mortgage, exceed your life insurance coverage amount.
Even if the above scenarios apply, you don’t necessarily need to buy lender-offered mortgage life insurance. An additional term life policy can provide the affordable coverage you need, while offering your loved ones maximum flexibility during a very stressful time.
Why term life insurance may be the smarter option
Both types of insurance provide protection for your mortgage, but traditional term life insurance offers flexibility that mortgage life insurance cannot. The payout of a term life policy ensures that your loved ones receive a tax-free lump sum to be used however it’s needed. While there’s no single right answer for everyone, term life insurance is often a better fit for individuals and families who want protection for their full financial picture, not only their mortgage.
Protect your mortgage with Blue Cross Life Term Life Insurance
Blue Cross Life is one of Canada’s leading life insurers. Our fully digital application process makes it easy for you to get flexible, affordable life insurance coverage that you can trust with just a few clicks. You’ll also benefit from:
- 100% tax-free payout for your beneficiaries
- Rates that never change throughout your term
- 10% discount on first-year premiums for couples
- $10,000 in free life insurance for each of your dependent children
- 30-day grace period for any missed payments
- Free cancellation at any time, without fees or penalties
- 30-day money-back guarantee