Mortgage Life Insurance vs. Term Life: Don't Buy the Wrong One
When you get a mortgage in Canada, your bank or credit union will almost certainly offer you "mortgage life insurance" along with the loan. It sounds convenient — the coverage matches your mortgage, and you sign up in five minutes at the same desk. But for most Canadians, a personal term life policy is a significantly better deal.
What mortgage life insurance is
It's a group creditor insurance policy held by the bank. If you pass, the policy pays off the remaining mortgage balance directly to the bank. The death benefit decreases as your mortgage balance decreases (decreasing term coverage), but your premium typically stays the same.
What's wrong with it
- The bank is the beneficiary, not your family. The payout goes to clear the mortgage. Your family gets a paid-off house but no cash to live on.
- Coverage shrinks but premiums don't. As you pay down the mortgage, the death benefit drops — but your premium stays the same. You're paying for less coverage every year.
- Post-claim underwriting. Many bank-sold policies don't fully underwrite you up front. They ask a few questions, take your money, and only investigate your health if you make a claim. Claims can be denied for things you didn't even know mattered.
- Not portable. Refinance with a new lender, sell and rebuy, or take your mortgage elsewhere — the policy doesn't follow. You start over.
- It's not cheap. Pricing is usually higher per dollar of coverage than personal term, especially if you're healthy and young.
Why personal term is better
- You name your own beneficiary. Your family receives the cash and decides what to do with it — pay off the mortgage, keep the cash and the mortgage going, or anything else.
- Coverage stays level. A 25-year term policy keeps paying $500,000 for the whole 25 years, not a declining balance.
- It's portable. Move, refinance, switch lenders — the policy stays with you.
- Underwritten upfront. Once approved and issued, the policy is in force and can't be cancelled for prior health unless you lied on the application.
- Usually cheaper. Especially for healthy, non-smoking, younger buyers.
When mortgage life can make sense
The one case where mortgage life is reasonable: you've been declined for traditional life insurance, the bank policy doesn't ask many questions, and you want the mortgage covered. Even then, look at simplified-issue or guaranteed-issue personal policies first — they usually beat the bank's offer.
The smart move
Get a personal term life quote sized to your mortgage plus your income-replacement need. Decline the bank's offer when they push it at the mortgage closing. The savings over a 25-year mortgage typically run into the thousands.
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