Mortgage Insurance – Clearing Up the Confusion
When Canadians hear “mortgage insurance,” they usually think of one thing. But in reality, there are two completely different products with completely different purposes:
Mortgage Default Insurance (CMHC, Sagen, Canada Guaranty) – Protects the lender if you default. Required if your down payment is less than 20%.
Mortgage Life or Disability Insurance (MLI) – Protects you and your family by paying off the mortgage if you die or become disabled.
In this article, we’re talking about the second type - mortgage life insurance - not CMHC insurance. Feel free to click here if you’re wanting to learn more about Mortgage Default insurance!
What is Mortgage Life Insurance?
Mortgage life and disability insurance is offered by your lender when you get your mortgage. It’s designed to cover the remaining balance of your mortgage if you pass away or are critically injured.
Key features:
Premiums are based on your age at the time you get the policy. If you buy the policy at 25, your premium stays at the “age 25” rate until you cancel it or pay off your mortgage.
Coverage decreases as you pay down your mortgage. If you started with a $400,000 mortgage and pass away years later with only $250,000 owing, the payout will be $250,000, not the original $400,000.
Policy is tied to the property and if you buy direct from the lender, may just be tied lender. If you move or switch lenders, the coverage may end (if you bought directly from them) and you’ll need a new policy - at your new age, with potentially higher premiums. If you move, policy ends regardless of how it is structured.
Underwriting is done at claim time. This is a big one. You could pay premiums for years only for your family to be denied a payout because of a health or lifestyle disclosure that comes up later. As long as you are honest at application time, this should not be a concern - but if there was a misunderstanding or something not disclosed, this may crop up and be a headache for your loved ones.
Personal Life or Disability Insurance
Personal coverage is purchased through a licensed insurance broker. It could be a term policy or a whole life policy.
Key advantages:
Usually cheaper with better coverage.
Portable - you keep it no matter where you live or how many homes you buy or sell.
Set coverage amount - if you take out a $400,000 policy, your beneficiaries get $400,000 whether your mortgage is $250,000 or $50,000 when you pass away.
Underwriting is done at the time you buy - so you know you’re covered before you start paying.
I’m not a licensed insurance broker, I would benefit from selling you mortgage life insurance - but I would rather you be informed and get the right coverage for yourself. Although there are sometimes Mortgage Life Insurance is beneficial, a lot of the times I would refer you to a reputable professional who specialize in this type of coverage.
When Mortgage Life Insurance Can Make Sense
MLI can still be useful if:
It’s a rental property - so the expense becomes tax-deductible
You don’t qualify for traditional life insurance OR traditional life insurance is very expensive
Bottom Line
Mortgage life insurance and CMHC insurance are not the same thing. One protects your lender, the other is meant to protect you, but even then, the details matter.
Before you check the box for mortgage life insurance at the bank, compare it to personal coverage. The right choice depends on your health, budget, and long-term plans.
📩 If you want a referral to a reputable insurance broker, contact me - I’ll connect you with someone who can help you get the right coverage for your situation.