If there’s one thing Canadians love more than hockey and poutine, it’s getting the best bang for our buck. Whether it’s a mortgage, rent, or life insurance, we want to make sure we’re investing our money in the right place. But when it comes to mortgage insurance vs life insurance, which one is actually better? 

At the end of the day, you want to protect your family and loved ones from unnecessary financial trauma – because losing you is bad enough! Mortgage insurance vs life insurance can be a contentious debate, but for most Canadians, one is the clear winner. Here’s the difference between mortgage insurance and private life insurance so you can shop like a boss and avoid getting screwed.  

Mortgage insurance vs life insurance 

Mortgage insurance, often called mortgage protection insurance, is specifically designed to protect lenders from taking a loss on your mortgage loan if you die, get injured, or fall critically ill before paying it off. The benefit is paid directly to your outstanding mortgage loan.

Life insurance is designed to provide financial protection for your family should you suddenly kick the bucket. It can be used to pay off debts like mortgages, car loans, student loans and lines of credit. It can also cover funeral expenses, your lost income, and even fund your kids’ childcare costs or college tuition after you’re gone. It’s a tax-free payment that your loved ones can use for pretty much whatever they want. 

Mortgage insurance is often framed as peace of mind for you and your family, but it could cost you a pretty penny if you don’t know how it works. So while both types of insurance can be beneficial, they serve different purposes and have different coverage options as well. 

Here’s what to know so you can save money and make the right choice for you and your family. 

Mortgage insurance vs mortgage default insurance 

Before we go any further we need to clear the air. Mortgage insurance and mortgage default insurance are two completely different things. In this article, we discuss the pros and cons of mortgage insurance – a type of life insurance product offered by lenders that has absolutely nothing to do with the size of your down payment. 

Mortgage default insurance, on the other hand, is required when you provide a down payment that is less than 20% of the property’s purchase price. The lender is typically insured by the Canadian Mortgage and Housing Corporation (CMHC) and they pass the cost onto you, because of course they do.

Mortgage default insurance solely protects the lender against financial loss in the event you default on your mortgage payments for whatever reason. This is not the type of insurance we are discussing in this article. To learn about mortgage default insurance, check out CMHC and Mortgage Default Insurance: The Secret No One is Telling You.

Mortgage insurance coverage

Mortgage insurance only covers the outstanding balance of your mortgage at the time of death – not any other debts or expenses. This type of policy also typically doesn’t require a medical exam but there are usually at least a few health questions to answer to determine your eligibility. 

Depending on the lender and insurance provider, you may have a choice between life, disability, and critical illness insurance to cover your mortgage payments or the outstanding balance in the event of a claim. Sometimes, all three types of coverage may be bundled together into one product regardless if you want or need all that coverage. 

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Lenders cannot force you to purchase mortgage insurance, doing so is actually illegal. However, they may use high-pressure sales tactics to get you to buy it. They may also wait until your final mortgage signing appointment to present it to you, limiting your ability to shop around for a policy better suited to your needs. Knowing this can empower you to make an educated decision when the time comes.

Is there an upside to mortgage insurance?

A few, but not many. One major benefit of mortgage insurance is that it will help ensure that your family can stay in their home after you die. This is especially important for people who have taken out large mortgages and might not be able to cover them if something unexpected were to happen. We're lookin' at you – BC, Ontario, and Montreal dwellers (‘cause your real estate prices are insane!).

Imagine if your spouse or young children were forced to move from the only home they’ve ever known because they can’t afford the payments without your income. How traumatic! 

Another advantage of having mortgage insurance is that it can potentially save you time and stress over other types of life insurance policies. Since mortgage insurance policies are tailored specifically for mortgage loans and don’t require medical exams or in-depth health screenings like other policies do, they tend to be easier and quicker to get than traditional life insurance. 

That's a major plus if you already know you don't qualify for traditional life insurance or have had a hella hard time getting it. It’s also helpful for those looking to buy additional property such as a cottage, vacation home, or income property

What are the downsides of mortgage insurance?

Despite the seemingly awesome upsides, there are even more not-so-awesome downsides. Here’s the not-good, the bad, and the ugly side of mortgage insurance: 

Higher Premiums

Mortgage insurance is almost always more expensive than a term life insurance policy because the premiums are based heavily on the original amount of your mortgage loan. That means if you have a large mortgage – ahem, Torontonians – or a long repayment period, then your premiums will be higher than they would be with a private term life insurance policy.

Plus, the premiums are built into your mortgage payment, making it that much higher. As such, mortgage insurance may not be ideal for people who are looking to keep their monthly mortgage payments as low as possible. 

Lack of flexibility 

You get what you get: Unlike private life insurance policies, mortgage insurance does not offer much – if any – flexibility in terms of coverage amounts or premium payments. Whatever you're offered by your mortgage lender is basically what you're stuck with. If you want to increase or change your coverage at some point, then you will need to purchase supplementary private insurance coverage. 

It’s attached to debt, not you: When it comes time to renew your mortgage, you might have to reapply for coverage. If you decide to change lenders altogether, your mortgage insurance does not move with you. You will for sure need to reapply for coverage with the new lender. In either scenario, the premiums will likely be even more expensive now that you're older and/or your health status has weakened. Plus, if you pay your mortgage off in full, you lose coverage. 

The lender is the beneficiary: Finally, you have no say in where the payout goes. Mortgage insurance goes straight to the lender to pay off the mortgage balance, not your loved ones. Your beneficiaries cannot use the money for what they actually need – because not every family needs to have the mortgage paid off. 

Gets more expensive over time

Another downside of mortgage insurance is that it only covers the balance remaining on your mortgage loan at the time of death. That means the payout amount decreases as you pay down your mortgage while the premiums stay the same. Your mortgage insurance actually becomes more expensive over time because you're paying the same price for a decreasing benefit. Also, if you have any other outstanding debts in addition to your mortgage – like credit cards, car loans, etc. –  these won’t be covered by your mortgage insurance policy either.

Higher chance of denial 

With mortgage insurance, your lender will ask you a few health-related questions to make sure you basically “pre-qualify” for a policy. However, it is not a comprehensive questionnaire and there is no medical exam. In the unfortunate event you need to make a claim, the insurance provider may then ask for more health information and take a closer look, depending on the lender and the insurance provider.  

This is called “after the fact” underwriting when the insurance company decides after you submit a claim if you were even qualified for coverage in the first place. Such practice is known to have a higher rate of denied claims – putting your family at additional risk of financial trauma. 

Private life insurance coverage 

Private life insurance gives you more control over how much coverage you want and how long you want it for. Plus, unlike mortgage insurance which is tied directly to your mortgage balance, private life insurance remains consistent throughout its duration. 

Additionally, private life insurance can be used for anything, not just paying off a mortgage, which makes it a great option for those who are looking for greater flexibility when it comes to their coverage options. 

Are there downsides to private life insurance? 

Ok, so there is no perfect thing under the sun. There are a few drawbacks to getting private life insurance, like a more exhaustive health questionnaire and sometimes even a medical exam

It can take longer to get approved and activate your policy because providers need to collect a lot more information about you. It also requires a little more footwork on your part to find what you need at the right price. Luckily, you can quickly and easily compare life insurance policies online.

If you have mortgages on other properties, like a cottage or a rental, it may be too expensive to increase your private life insurance enough to cover those mortgages in full. 

The advantages of private life insurance

Despite those few drawbacks, there are tons more benefits to getting a private life insurance policy vs mortgage insurance, like:

You get to choose your beneficiaries 

When it comes to choosing who will receive the benefits of your life insurance policy, private policies provide more options than mortgage insurance does. With a private policy, you can choose anyone you want – like your spouse, children, or other family members— as the beneficiary of your policy. This gives you more control over who will receive the money from your policy when the time comes. 

Flexible coverage

With a private life insurance policy, you also have more flexibility in regard to how much coverage you want to buy. With mortgage insurance, the coverage amount is determined by the balance of your mortgage loan. Sometimes there’s a cap on the coverage amount that is less than your mortgage balance! With a private life insurance policy though, there are no such restrictions. 

Instead, coverage amounts can be tailored to meet your specific needs and budget.  For example, if your family requires $500K worth of coverage but your mortgage is only $300K, that money can be used to meet your family’s most pressing needs. They can choose to pay off the mortgage in full, pay down a portion, or not do anything beyond maintaining the payments. Not every family needs to have the mortgage balance paid off. 

Affordable premiums

Private life insurance policies often come with competitive rates compared to mortgage insurance policies because they take the time to fully assess your health status before approving the policy. Since a mortgage insurance policy has a different underwriting process, skips the medical exam, and doesn’t collect as much health information, people with a riskier health profile or a pre-existing condition are more likely to qualify. That elevated risk is factored into your mortgage insurance premium making it more expensive.  

Additionally, many insurers also offer discounts and other perks on their products for certain circumstances, such as adding additional riders or switching providers. This further reduces the overall cost of premiums associated with these types of policies. For example, PolicyMe throws in complimentary child life insurance for people with kids – a perk missing from mortgage insurance.  

As such, it's always wise to shop around and compare rates from multiple providers before making a final decision on which company offers the best value for money when it comes to buying private life insurance policies. 

Savings & investment opportunities   

Private life insurance can also offer additional savings and investment opportunities over mortgage insurance policies. You have the ability to save money through tax-efficient investments and some even let you borrow money against the value of the policy. This provides an additional layer of financial protection in case of an emergency or unforeseen event. 

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Mortgage insurance vs life insurance: which is better? 

Mortgage life insurance can be a great way to make sure that your mortgage is paid off in the event of an untimely death. But it’s not the only way, nor is it even the best way for most people. 

What if you need to change your coverage? What if you don't have a mortgage, does that mean you don't need life insurance at all? Of course not! In fact, when it comes to protecting your family's financial well-being, private life insurance is actually the better option for most people!

You can tailor your private life insurance policy exactly how you want without breaking the bank on premiums or jacking up your monthly mortgage payment. It's definitely worth exploring this option if you're looking for peace of mind knowing that those who depend on you will be taken care of if something should happen to you unexpectedly.


What is the difference between life insurance and mortgage insurance? 

Private life insurance is a type of policy you can purchase to provide your family with a death benefit in the event you pass away unexpectedly. Most private life insurance providers also offer add-ons, called riders, that can offer additional financial protection in the event you become disabled or critically ill and cannot work. 

Mortgage insurance, on the other hand, protects the lender from financial loss and ensures your loved ones can keep living in their home if you pass away. Sometimes mortgage insurance can also cover a disability or critical illness that might cause you and your family financial hardship.

While both private life insurance and mortgage insurance provide essential protection for Canadians, it's important to understand the differences between mortgage insurance vs life insurance before making a decision.  

Why do you need life insurance on a mortgage?

For most Canadians, it is more cost-effective to have enough private life insurance to cover the mortgage balance and/or payments in the event the unthinkable happens. However, there can be cases when you do not qualify for private life insurance, can’t afford coverage high enough to cover the mortgage, or need financial protection on a secondary property, among many other scenarios.

In that case, life insurance on a mortgage helps to provide peace of mind that when the unexpected happens, your home is secure. Life insurance on a mortgage serves as protection against early death, disability or critical illness which could lead to financial hardship. It can provide you with an additional layer of security and equity assurance as part of responsible homeownership and financial planning.

However, you need to understand how mortgage insurance vs life insurance works in order to choose the right solution for your needs. 

Do you need mortgage insurance if you already have life insurance?

That depends on your individual situation, how much life insurance coverage you currently have, for how long, and if you have additional coverage for disability and/or critical illness. Life insurance can be used to pay off some of the costs associated with the mortgage in the event of your death. Depending on what your loved ones actually need, the benefit can be used to pay out the entire balance, cover the payments for a period of time, or be used for something else entirely.

Mortgage insurance, on the other hand, offers financial protection for those left behind in case you die, but the benefit is paid directly to the lender and applied to the mortgage loan. Depending on the lender and provider, it can also help if you become disabled or critically ill by covering the monthly mortgage payments.

You should carefully consider the needs of your loved ones and the options available to you before deciding whether or not additional financial protection is necessary.

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