Mortgage Life Insurance vs. Term Life Insurance
Many homeowners find that term life insurance can provide the same level of confidence as mortgage life insurance, while also offering a host of long-term financial benefits that can’t be achieved with mortgage insurance alone.
When you take out a mortgage in Canada, you’ll likely be offered mortgage life insurance (i.e., a form of loan insurance that pays off the outstanding balance if you die). It seems like an uncomplicated choice because the cost of the coverage is added to your mortgage payment. It’s convenient and you get some peace of mind knowing that insurance can pay off your mortgage in the event of your death, and your loved ones will be spared the financial burden.
However, mortgage insurance is not mandatory (source), and is not your only option if you want to protect your family in the event something happens to you. Many homeowners have found term life insurance can provide the same level of confidence plus a host of long-term financial benefits that can’t be achieved with mortgage insurance alone.
What’s the difference?
Mortgage life insurance is a contract between you (the policyholder) and your bank’s insurance provider. This kind of insurance only kicks in when you die, letting your estate off the hook for the outstanding balance.
The beneficiary (i.e., the individuals and groups who will receive the money) of your mortgage life insurance policy is the lender who holds the mortgage, not you or your family. And the insurance payout can only be used to cover the balance owing on your mortgage.
In this sense, mortgage insurance is a “single-use” policy because it can only be used to cover your mortgage debt. This also means that the value of your coverage is what’s called a declining benefit. Kathleen Bauer, an insurance advisor with Serenia Life, explains it like this:
“When you pay for mortgage life insurance, the premiums stay the same month after month. However, the amount of money you owe on your mortgage goes down every month. So the payout you receive is also declining over time. Toward the end of your mortgage, you may owe a relatively small amount but your premiums haven’t gone down.”
For this reason, many financial advisors suggest that term life insurance is a better, long-term solution for mortgage protection.
Term life insurance is also a contract between you and an insurance company; however, your loved ones – not the lender – receive the payout in one, tax-free lump sum. They can use the money any way they wish, to:
• Pay off the mortgage
• Top up retirement savings
• Take time off and use the money as monthly income
• Put the kids through school
• Renovate or buy a cottage
Think of life insurance as a “multi-use” policy because your loved ones have the flexibility to use the money any way they wish. And the advantages don’t stop here.
5 advantages of term life insurance
When your goal is to provide your family with the means to pay off your mortgage, term life insurance has the upper hand for the following reasons:
- You can choose a term that matches your needs. Term life insurance policies are sold in “terms,” meaning the length of time the policy is in effect. For example, Serenia Life offers 10-year, 20-year, and 30-year terms, allowing you to pick one that most closely matches the length of your mortgage. In this sense, it’s not much different than mortgage life insurance until you factor in the cost. If you’d like to learn how to estimate the amount of life insurance you might need, this guide can help.
- The cost can be much lower than mortgage life insurance.When you apply for term life insurance, your age and good health work in your favour. As a rule, coverage is much cheaper when you’re young and have had no major medical diagnoses. This makes sense because you don’t present a big risk to the insurer. By comparison, mortgage life insurance rates are not personalized. Lenders set the cost based on your age and the amount you owe. For example, a 36-year-old buying mortgage life insurance on an outstanding balance of $500,000 on a 30-year amortization should expect to pay around 20 cents for every $1,000 of coverage1 ($100 a month). If the same 36-year-old male took out a 30-year term life insurance policy instead, the monthly cost would be just $62 a month2 and the payout would not decline over time.
Comparing rates
Type of coverage How is the cost determined? Coverage Amount Monthly Cost Coverage Amount at the End of Term Mortgage life insurance A percentage of what you owe $500,000 $100 $0 Term life insurance Based on your age and health status $500,000 $62 $500,000 until the expiry date of your policy. - Term life insurance lets you stay insured. Qualifying for life insurance at an early age might not seem like a big deal because you don’t imagine your health situation changing much over time. But it could. Significant changes to your health could make it more difficult and more expensive to obtain coverage as you get older. In extreme circumstances, you could even be denied life insurance coverage if you don’t have an existing policy in place. On the other hand, once you’re insured, you have the right to renew your life insurance coverage and you cannot be denied due to changes to your health. But a healthy 36-year-old who pays for mortgage life insurance through their lender, could be denied coverage at age 55 due to health concerns or may pay significantly more due to age.
- Term life insurance lets you increase coverage. If you buy a home when you are relatively young and plan to take 25 to 30 years to pay it off, you may think that having enough insurance to cover the outstanding balance is enough. However, as you get older and you start to make more money, your coverage needs may change, and as a result, so might the amount you’d like for your payout. For example, at the height of your income-earning years, your family probably relies on your salary to help pay for living expenses, retirement savings, kids’ education, an emergency fund, and maybe even a family cottage. In other words, it’s not enough to simply pay off the mortgage. Your family will need to replace the income that you no longer provide. And that’s when you’ll appreciate the ability to increase coverage to whatever level you need.
- Term life insurance can be upgraded. In addition to leaving your loved ones with a one-time payment to help cover their living expenses, there are added features you can purchase to enhance and personalize your coverage. Many insurance providers offer riders (i.e., coverage that gets added on to an insurance policy to provide additional payouts under specific circumstances) that you can easily purchase at any time. Here are a few examples of additional optional benefits offered by Serenia Life:
Total Disability Waiver
The Total Disability Waiver ensures that your life insurance protection remains intact if you become totally disabled for a period of at least six months and cannot earn any income.
Accidental Death Benefit
The Accidental Death Benefit provides your beneficiary with an additional death benefit if you were to die by accident.
Child Term Benefit
The Child Term Benefit allows you to purchase a small amount of life insurance coverage for your children and future children – providing them with the start of a solid financial plan. This benefit can be converted between 18 and 25 to any product available at that time. Each child can convert up to five times the benefit amount without having to provide any medical evidence of insurability.
Deciding what’s right for you
Insurance doesn’t need to be complicated. Using the chart below, ask yourself what you want to achieve by purchasing mortgage life insurance or term life insurance.
| What’s in it for you? | Mortgage life insurance | Term life insurance |
|---|---|---|
| The mortgage gets paid off if you die | ✔️ | ✔️ |
| Quick in-person or online application process | ✔️ | ✔️ |
| The most affordable option | ❌ | ✔️ |
| You want to choose who gets the payout | ❌ | ✔️ |
| The flexibility to increase, renew, or convert coverage | ❌ | ✔️ |
Get a quote online
If you’re thinking about buying a home or renewing your mortgage soon, get a fast, no-obligation quote on affordable, uncomplicated term life insurance.
If you’re uncertain about the best way to insure your mortgage balance, or you want advice on how to construct a more comprehensive insurance plan, we can help. The experts at Serenia Life will take all the time you need to help you make the right decision for today and for the future.
This blog post contains general information only. Because each person’s situation is unique, it is always best to speak with a qualified professional to better understand your needs.
1Based on a comparison of rates published on WOWA.ca, 2022. Source. In this example, 20 cents of coverage is required for every $100,00 of coverage. $500,000/1000 =500 X $0.20 = $100.
2Based on purchasing Term 30 Life Insurance coverage from Serenia Life Financial. Rate is an estimate only for a 36-year-old, non-smoke, who did not include additional coverages. Rates vary and can only confirmed at the end of the complete application process.
