The Key Differences Between Mortgage Insurance vs Life Insurance

Your mortgage is one of the biggest financial commitments you’ll likely make; that’s why it’s important to safeguard it and ensure that your loved ones are protected if you’re no longer around to help.

But when it comes to mortgage life insurance vs term life insurance, what are the differences? And which is the better choice?

We’ll walk you through the fundamentals of both types of insurance so you can make an informed decision about which option is right for you.

What is mortgage life insurance?

Mortgage life insurance is an optional policy offered by your mortgage provider or bank that is designed to help pay off your mortgage in the event of your unexpected passing.

In that event, if there’s a remaining balance on your mortgage, the insurance provider will pay off the amount owing to your mortgage lender, so your family will can continue to live in their home without outstanding debts.

What is life insurance?

Life insurance is a financial security blanket for your loved ones in the event that the unthinkable happens. The life insurance company will provide your loved ones, also known as your “beneficiaries,” with a tax-free lump-sum payment in return for paying your monthly premiums.

There are two main types of life insurance:

1. Permanent life insurance

Permanent life insurance provides life-long coverage. Because it’s guaranteed to pay out and often comes with a cash value component, these types of policies are much more expensive than term life insurance, usually around five to ten times higher in monthly premiums.


2. Term life insurance

Term life insurance provides coverage for a set period of time, commonly 10, 20 or 30 years. Premiums are more affordable than permanent life insurance since there is less of a risk of passing away during the term length. Term life insurance is the better option for most Canadian families. It’s more affordable and covers you only for as long as you really need it, like when you still have a significant balance left on your mortgage.

What does each type of insurance cover?

Mortgage life insurance is solely intended to pay off your mortgage. For that reason, the payout is paid directly to your mortgage lender or bank, not to your beneficiaries.

Term life insurance, on the other hand, offers flexibility in how your family can use the payout, since it goes to your beneficiaries and not your mortgage lender. It can be used toward anything your beneficiaries might need help with, without you there.

As Alex Leduc, founder and CEO of Perch, says,Paying out a mortgage is just one consideration and should not be the only one. Life insurance factors in the bigger picture like how much income my family would need and specific expenses that would need to be taken care of.

Whether it’s paying off a mortgage or supporting your child’s education, term life insurance empowers your family with financial flexibility.

How long do mortgage life insurance and term life insurance last?

Mortgage life insurance coverage lasts for your entire mortgage duration. When your mortgage is fully paid off, the policy ends.

Term life insurance coverage lasts for a period of time that you choose. In that way, term offers more flexibility, allowing you to customize the policy’s length based on your unique needs. 

For instance, if your mortgage has a 20-year amortization period, you can choose a 20-year policy to provide coverage for that time. 

How much does mortgage insurance cost vs life insurance?

Mortgage life insurance is often pricier than term life insurance. The cost of mortgage life insurance is based on age and mortgage debt, with older individuals and those with higher mortgage balances paying higher premiums. Unlike term life insurance, mortgage life insurance policies don’t factor in individual risk, which means that even healthy individuals may pay end up overpaying. 

On top of this, mortgage life insurance premiums stay the same, so you won’t pay less as you pay down your mortgage, even though payout decreases with each mortgage payment.

Term life insurance is typically much more affordable than mortgage life insurance since its premiums are based on your individual risk. As long as you’re not a smoker or a skydiver, your premiums will are likely to be lower than the standardized rates used by mortgage life insurance providers.

Plus, with term life insurance, both the premium and death benefit stay the same for the entire term, unlike mortgage insurance where the premium stays the same but the benefit decreases as the mortgage balance is paid off.

Changing mortgage providers: mortgage insurance vs life insurance

If you switch mortgage providers, your existing mortgage insurance policy will end. This is a significant factor to keep in mind if you move your mortgage from one provider to another at the end of your term.

After you switch providers, you’ll need to get a new mortgage life insurance policy connected to your new mortgage. However, since you’ll be older by the time you switch, the rates are likely to be higher.

Term life insurance, on the the hand, isn’t linked to your mortgage and won’t be affected if you switch mortgage providers.

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While mortgage life insurance may seem like a convenient option, keep in mind that it’s tied to your mortgage lender, offers limited coverage and tends to be pricier.

On the other hand, term life insurance offers more flexibility, more comprehensive coverage and more budget-friendly premiums. With term life insurance, you can choose your beneficiary, cover more than just your mortgage debt, and rest assured that your premiums will remain the same for the duration of your policy’s term. Plus, your policy isn’t tied to your lender, so you can switch mortgage providers without worrying about your coverage. 

At the end of the day, term life insurance makes sense for most Canadians looking to protect their mortgage–and more–in the event of the worst-case scenario.