Mortgage Protection Insurance: Lender Coverage or Term Life?

When you take out or renew a mortgage, your lender will usually offer insurance that pays off the balance if you die, and sometimes makes your payments or pays down the balance if you become disabled or critically ill. Here is how it compares with an individual term life policy: who gets the money, how much, when your health is checked, and what happens when you switch lenders or cancel.

The short version

Two kinds of protection, and one that isn't

The Financial Consumer Agency of Canada (FCAC) calls the coverage lenders offer optional mortgage insurance: life, disability, critical illness and job loss coverage. Lenders also call it creditor insurance or balance protection.

• Lender coverage. Offered by your bank or credit union, usually when you take out or renew your mortgage. Your certificate of insurance sets out the terms, and claims go to the insurer named in it.
• Individual term life insurance. A policy you buy from an insurer that pays if you die within a set period, such as 20 years, or before a set age, such as 65.
• Not default insurance. Mortgage default insurance, often called CMHC insurance, protects the lender if a borrower stops paying and is required with less than 20% down. I explain it in Mortgage Default Insurance.

Lender coverage is your choice: you don't need it to be approved, a lender can't require it or make it a condition of another product, and you must give your express consent. A federally regulated bank must also give you a separate disclosure statement before you consent and offer products suited to your circumstances. These federal rules cover banks and federal credit unions; with a provincial credit union or another lender, ask about its terms.

Who gets the money

• Lender coverage pays the lender. The benefit, up to the plan's maximum, goes toward paying off your mortgage. Nothing is paid to your family directly.
• Term life pays the people you choose. The death benefit is a one-time, tax-free payment to the beneficiaries you name, who can use it for any purpose: clearing the mortgage, keeping up the payments or replacing your income.
• Name a person, not your estate. FCAC notes that if you name your estate, or no one, the money goes through your estate and can be claimed by creditors.

FCAC also points out that a home can be sold to repay the mortgage, so mortgage life insurance may not be necessary. It can help when your family would want to stay in the home but couldn't afford the payments.

Declining or level coverage

With lender coverage, the death benefit is your outstanding balance, so it shrinks as you pay the mortgage down. With term life, you choose the amount, and it stays the same while the policy is in force.

Take a $600,000 mortgage over 25 years at an example rate of 4.5%, assumed to stay the same throughout. The payment is about $3,321 a month, and the balance falls like this:

• After 5 years: about $526,800
• After 10 years: about $435,300
• After 15 years: about $321,000
• After 20 years: about $178,300

Lender life coverage would pay those amounts to the lender. A $600,000 term policy would still pay $600,000: at year 15, enough to clear the balance and leave about $279,000 for your family. Lender plans also have limits: TD's, for example, caps life coverage at $1,000,000 across all your TD mortgages and ends it at age 70. A term policy ends with its term, so choose one that lasts as long as you need it.

When your health is checked

• Lender coverage: short questions now, a closer look later. FCAC says you usually answer a short yes or no health questionnaire and may be approved right away. When you claim, you may need to give more information or take a medical exam. Inaccurate answers can make the insurance invalid, and depending on the plan, a claim can be denied for a related pre-existing condition or for symptoms you had when you applied. Checking eligibility at claim time is sometimes called post-claim underwriting.
• Term life: underwritten up front. The insurer reviews your health before it issues the policy, and your medical history is one of the factors in your premium.

On either application, answer every question fully and accurately. FCAC suggests taking the forms home to check with a medical professional if you need to, and asking to see the certificate, with its exclusions, before you apply.

Switching lenders, refinancing and moving

Lender coverage belongs to that mortgage at that lender. TD's certificate, for example, ends life coverage if the mortgage is transferred to another financial institution, paid in full, refinanced (though continued coverage may be available), discharged or assumed. Quebec's insurance regulator, the Autorité des marchés financiers, puts it plainly: if you switch lenders, you need new insurance, which you can get only if you are still insurable.

So if you move your mortgage at renewal, you would apply again at your age and health then; see Renewing Your Mortgage and Porting, Blending or Breaking. A term policy is yours: a new lender, a refinance or a move doesn't affect it, and it stays in force until the term ends, as long as you pay the premiums.

What you pay

• Lender coverage. Premiums are based on your mortgage amount and your age when you apply, are usually added to your mortgage payments and generally stay the same as the balance falls, so over time you pay the same for less coverage. They aren't always locked in: TD's certificate lets its rates change with 30 days' written notice.
• Term life. Premiums depend on factors such as your age, gender, medical history and coverage amount. They are generally set for the length of the term and may go up if you renew.
• Couples. With TD's coverage, for example, once a life benefit is paid, coverage ends for every insured borrower on that mortgage. A joint first-to-die term policy also pays once and is usually cheaper than two single policies, which cost more but pay separately and make it easier to change beneficiaries after a separation.

FCAC notes that term or permanent life insurance may offer better value, so get quotes before you decide.

Disability, critical illness and job loss coverage

Lenders also offer coverage that makes your mortgage payments if you can't work because of a severe injury or illness, pays toward the balance for a covered critical illness, or helps if you lose your job. Check what your benefits at work already pay, then read the plan:

• Check the conditions. Plans list the illnesses and injuries they cover and exclude, and pre-existing conditions are usually not covered.
• Check the limits. The certificate sets out the maximum benefit, the maximum age and claim limits, such as how long payments last. Most insurers also set a claim deadline, usually 90 days to a year after the event, and job loss benefits may not be available if you are self-employed.

Cancelling, replacing and questions to ask

You can cancel lender coverage at any time, following the steps in your certificate. TD's plan, for example, gives a full refund within 30 days of the letter confirming your premiums, unless you have made a claim. A term policy has no cash value to pay out if you cancel it.

If you are replacing one with the other, keep the old coverage until the new policy is approved and in force. If you buy through an agent, the Insurance Council of British Columbia's licensee directory shows whether they are licensed in BC and for which types of insurance. Before you sign up, ask:

• Who is the beneficiary, and what would be paid in year 1, year 10 and year 20?
• When is my health assessed, and what does the plan exclude?
• When does coverage end, and can the premium change?

Questions buyers often ask me

Do I have to buy my lender's mortgage life insurance?

No. FCAC says you don't need it to be approved for a mortgage, a lender can't require it, and you must give your express consent before you are covered.

Who receives the money from mortgage life insurance?

Your lender. The benefit is your outstanding balance, up to the plan's maximum, and it goes toward paying off the mortgage. A term life policy pays its full amount, tax-free, to the beneficiaries you name.

What happens to my lender coverage if I switch lenders at renewal?

It generally ends, so you would apply for new coverage with the new lender, at your age and health at that time. A term life policy isn't affected by a change of lender.

Can a claim be denied after I was approved?

Yes. Approval usually rests on a short health questionnaire, and the insurer can ask for more information when you claim. Inaccurate answers can make the coverage invalid, and a related pre-existing condition can be excluded.

Is mortgage protection insurance the same as CMHC insurance?

No. CMHC insurance is mortgage default insurance: it protects your lender if you stop paying and is required with less than 20% down. Mortgage protection insurance is optional and pays if you die or, with some plans, become disabled or critically ill.

Planning your purchase? See how much house you can afford, read how life insurance fits into co-buying a home with family or friends, or try my mortgage calculator.

This article is general information, not financial advice. The details come from FCAC, Quebec's Autorité des marchés financiers, the Canadian Council of Insurance Regulators, the Insurance Council of British Columbia and a lender's published certificate, and were current at the time of writing; your own certificate or policy sets out your coverage. For FCAC's guide, see optional mortgage insurance products.