What is mortgage protection insurance?
It is life insurance meant to clear or carry the mortgage if a borrower dies. There are two ways to get it, and they work differently.
Insurance from your lender is offered when you sign the mortgage. It is a group creditor policy. If you die, the insurer pays the outstanding balance to the lender.
A personal policy is ordinary term life insurance that you own, for an amount and term that match your mortgage. If you die, the insurer pays the full amount to the person you named.
How do the two compare?
| Insurance from the lender | Personal term life policy | |
|---|---|---|
| Who is paid | The lender | The person you name |
| Amount paid | The balance owing, which falls over time | The full amount you bought |
| Premium | Often stays the same while the balance falls | Level for the term you chose |
| Switching lenders | Coverage usually ends, and you reapply at your new age and health | The policy stays with you |
| Who owns it | The lender holds the group policy | You |
| Use of the money | Pays the mortgage only | Any need: mortgage, income, childcare |
Neither is wrong for everyone. Lender insurance is quick to set up. A personal policy gives your family the choice of what to do with the money, and keeps the same coverage if you renew with a different lender.
Is this the same as CMHC insurance?
No. Mortgage default insurance from CMHC, Sagen or Canada Guaranty is required when the down payment is under 20 percent. It protects the lender if you stop paying. It does nothing for your family if you die.
How much and how long?
Start with the mortgage balance and the years left on it. Many home owners add an amount for income replacement, since a paid-off house still has taxes, utilities and upkeep. If you already have personal life insurance, check whether it is enough to cover the new mortgage before buying more.
What about illness or disability?
Death is one risk to the mortgage. A long illness or injury that stops your income is another. Critical illness insurance pays a lump sum on diagnosis of a covered condition, and disability insurance replaces part of your income while you cannot work. I can quote either alongside the life coverage.
Common questions
I already have my lender's mortgage insurance. Can I switch?
Yes. Apply for the personal policy first. Once it is approved and in force, you can cancel the lender's coverage. Never cancel existing coverage before the new policy is active.
Is personal coverage cheaper than the lender's?
It depends on your age, health and tobacco use. A personal policy is priced on you individually, so healthy non-smokers often see a lower price. A quote shows you the actual difference.
Do both spouses need coverage?
If both incomes pay the mortgage, yes. If one person stays home, think about what childcare and household help would cost without them.
Does the coverage drop as I pay down the mortgage?
On a personal term policy, no. The amount stays level unless you choose to reduce it.
Sources
Written and reviewed by Sandeep Singh Pawar, licensed life insurance agent in Ontario. Last reviewed .