Mortgage Life Insurance vs Term Life Insurance in Canada: What’s the Difference?
When you get a mortgage, you may be offered mortgage life insurance (MLI). But how is it different from a regular term life insurance policy?
Neither is automatically better. The right choice depends on your age, health, existing insurance and what you want the coverage to accomplish.
Mortgage Life Insurance and Term Life insurance does two different things to accomplish one goal - protect your loved ones.
How Mortgage Life Insurance Works
Mortgage life insurance is designed primarily to pay off your mortgage if you die.
Your coverage is generally connected to your mortgage balance. As you pay the mortgage down, the potential payout decreases, while your monthly premium will typically stay the same.
If a claim is approved, the insurance proceeds are paid toward the mortgage directly to the lender. Your family benefits from having some or all of the mortgage eliminated, but they don't receive additional cash from the policy.
Mortgage Life Insurance Can Have Coverage Limits
Mortgage insurance policies also have maximum coverage amounts, and the limit varies by provider.
For example, some mortgage life insurance products have a maximum benefit of $500,000.
If you had a $700,000 mortgage with only $500,000 insured, the insurance wouldn't necessarily eliminate the entire debt. The remaining mortgage balance would still have to be dealt with through other insurance, savings or estate assets, continued mortgage payments, refinancing or the eventual sale of the property.
This can be particularly important today when Canadian mortgage balances can easily exceed the insurance maximum.
How Term Life Insurance Is Different
With an individual term policy, you choose the amount of insurance and your beneficiaries.
For example, you could purchase $750,000 of coverage for 20 years.
Even if your mortgage falls from $700,000 to $400,000, the death benefit generally remains $750,000 during that term.
Your beneficiaries receive the money and decide what to do with it. They could pay off the mortgage, replace lost income, cover childcare or use it for other expenses.
Read the fine print on your insurance policy and get the details on what works best for you
The Underwriting Is Different
Term life insurance is generally underwritten when you apply. The insurer reviews things such as your age, health, smoking status and medical history before issuing the policy. They may have medical exams or have other requirements for the approval.
Mortgage life insurance often has a simpler application process based on health questions you self-report. Depending on the product, eligibility may be reviewed more closely when a claim is made. Incomplete or inaccurate information on the original application could potentially create problems with a future claim.
Is Mortgage Life Insurance Portable?
It depends on the policy.
Insurance purchased directly through a lender may be tied to that lender. If you move your mortgage elsewhere, your coverage may end and you may have to apply again at your new age and health status.
Other mortgage insurance products are portable.
For example, mortgage brokers with TMG - The Mortgage Group can offer TMG Assure, with coverage through Canada Life. TMG states that its mortgage insurance can move between lenders without a change in rates or the need to requalify, and coverage can also be retained when refinancing or moving the mortgage to another property (barring some exceptions).
So don't assume mortgage insurance is (or isn't) portable. Check your specific policy.
Which Is Cheaper?
That depends heavily on the individual.
If you're young and healthy, an individual term policy will often be more cost-effective and provide more coverage.
If you're older or have had health issues, mortgage life insurance may be more competitive or easier to qualify for.
The important thing is to compare the actual policies available to you.
Sometimes Both Can Make Sense
Mortgage life insurance doesn't necessarily have to replace other life insurance. You may want them to complement each other.
For example, you may already have life insurance through work that you want your family to use for lost income and other expenses.
Mortgage life insurance could then be used specifically to cover the mortgage. Heck, you may also want a term policy on top of that too if you think your work policy isn’t enough.
Mortgage insurance takes care of the house. Your other insurance takes care of everything else.
Mortgage Life Insurance vs Term Life Insurance: The Bottom Line
Mortgage life insurance and term life insurance solve slightly different problems.
Mortgage life insurance is primarily designed to take care of your mortgage.
Term life insurance provides a set benefit to the beneficiaries you choose.
Before choosing either, compare the cost, amount of coverage, coverage limits, underwriting, portability and who ultimately receives the money.
The question isn't simply “Which one is cheaper?”
It's “If something happened to me, what do I actually want my insurance to take care of?”
Schedule a time to chat about your mortgage here - I’d be happy to provide my insights!
Jeff Dinsmore
Mortgage Broker
TMG - The Mortgage Group
FSRA # 10315
519-574-7308
Insurance products, eligibility, pricing and coverage vary by provider. This article is intended to provide general information about the broad differences between mortgage life insurance and term life insurance and should not be considered insurance advice. Review the specific terms of any policy you are considering and speak with a licensed insurance professional when appropriate. I am not a licensed life insurance advisor, so please speak with your insurance provider or a licensed insurance professional to determine what coverage may be appropriate for your individual circumstances.