How to Choose Between Life Insurance vs Mortgage Protection: A Simple Guide for Homeowners

Thinking about protecting your mortgage can feel overwhelming. You’ve worked hard to buy your home, and now you’re faced with another insurance decision. Should you get life insurance or mortgage protection insurance? It’s a choice that many Canadian homeowners find confusing.

Your mortgage is likely your biggest monthly expense, and the thought of leaving that burden to your family is concerning. We understand why this decision matters so much to you.

Consider what would happen to your family if you passed away unexpectedly. Would they be able to keep the house? How would they manage the mortgage payments along with all their other expenses?

Term life insurance offers a solution that goes beyond just covering your mortgage. When you pass away, your beneficiaries receive the death benefit directly. They can use that money to pay off the mortgage, cover other debts, or handle any expenses they need to. The choice is theirs.

More than just mortgage coverage, life insurance gives your family flexibility during a difficult time. They’re not locked into using the money for one specific purpose.

This guide will help you understand both options so you can make the right choice for your family’s situation. You may not even need a medical exam to get the coverage you want.

What You Need to Know About Both Options

Life insurance and mortgage protection insurance might seem similar, but they work quite differently. Understanding how each one operates will help you choose the right protection for your family.

How life insurance works

A life insurance policy is an agreement between you and the insurance company. You pay monthly premiums, and when you pass away, your beneficiaries receive a death benefit. The money goes directly to the people you choose, and they can spend it however they need to.

Your beneficiaries don’t pay tax on the death benefit they receive. They can use it to pay off the mortgage, cover funeral costs, replace your income, or handle any other expenses. The choice is entirely theirs.

There are two main types of life insurance you can buy. Term life insurance covers you for a specific period – maybe 10, 20, or 30 years. It costs less than permanent life insurance because it’s temporary. Permanent life insurance covers you for your entire life and includes a cash value component, but the premiums are higher.

The cost of your life insurance depends on your age, health, the amount of coverage you want, and your lifestyle choices.

What mortgage protection insurance covers

Mortgage protection insurance is designed specifically to cover your home loan. This is different from the mortgage default insurance that some homeowners need if they put down less than 20%.

Mortgage protection insurance typically includes several types of coverage:

• Life coverage that pays off your remaining mortgage balance when you die

• Disability coverage that makes your mortgage payments if you can’t work due to injury or illness

• Critical illness coverage that reduces or eliminates your mortgage if you’re diagnosed with certain conditions

You usually get this insurance through your mortgage lender, though it’s separate from your actual mortgage.

The important differences between them

The biggest difference is who gets the money. With mortgage protection insurance, the payment goes straight to your lender to pay off your mortgage. Your family never sees or controls those funds.

With life insurance, your chosen beneficiaries receive the full amount. They decide how to use it – whether that’s paying off the mortgage or addressing other financial needs.

Mortgage protection coverage decreases as you pay down your mortgage, but your premiums often stay the same. You end up paying the same amount for less and less coverage over time. Life insurance maintains the same coverage amount throughout the policy term.

If you sell your house, switch lenders, or pay off your mortgage early, your mortgage protection usually ends. Life insurance stays with you regardless of what happens with your home situation.

What Happens to the Money When You’re Gone

The biggest difference between these two insurance options comes down to one simple question: who gets the money when you pass away?

Where the payout actually goes

With mortgage protection insurance, your family never sees the money. The insurance company pays your lender directly to cover whatever you still owe on your mortgage. Your loved ones don’t have any say in how those funds get used.

Life insurance works differently. You choose who receives the money, and they get the full amount directly. Your beneficiaries can decide for themselves how to use those funds based on what they need most at the time.

This control makes all the difference during an already difficult period.

Covering more than just your mortgage

Most Canadian families have expenses beyond their mortgage payments. When you have life insurance, your beneficiaries can use the death benefit to handle whatever financial pressures they’re facing:

• Funeral costs and final expenses

• Credit card balances and personal loans

• Children’s education costs

• Daily living expenses while they adjust

• Outstanding medical bills

Your family gets to prioritise what matters most to them. They might choose to pay off the mortgage completely, or they might decide to keep making payments and use the money for other urgent needs.

Mortgage protection insurance doesn’t give them that choice.

Protecting your family from all your debts

If you’re like most Canadian homeowners, your mortgage isn’t your only debt. You might have a business loan, credit card balances, or a car payment. Life insurance can help your family deal with all of these obligations, not just the mortgage.

The death benefit gives your beneficiaries options. They can pay off debts strategically, keep some savings for emergencies, or make decisions based on their specific situation. They won’t be forced to sell assets or struggle with payments they can’t afford.

Even if you have health concerns, you can still get life insurance without a medical exam. This protection extends far beyond just covering your mortgage – it covers your family’s entire financial picture.

Costs and Coverage: What You Need to Know

Money matters when you’re choosing insurance. Most Canadian homeowners want to know which option gives them the best value for their premium dollars.

What you’ll pay and what you’ll get

Mortgage insurance rates typically range between 2.8% to 4% of the initial mortgage amount. Term life insurance costs less than mortgage protection insurance and can be up to 70% cheaper.

Here’s where it gets interesting. With mortgage protection, you pay the same premium every month even though your coverage decreases as you pay down your mortgage. Think about it: you’re paying the same amount for less and less coverage over time. Term life insurance keeps the same coverage amount throughout the policy term. Your premiums stay stable, and your coverage stays the same.

If you’re looking for better value over time, term life insurance makes more sense.

Medical exams and health questions

Mortgage protection insurance usually requires answering only a few health-related questions with no medical examination. That sounds convenient, but it means higher premiums since providers assume everyone has the same level of risk.

Non-medical term life insurance gives you coverage without physical examinations or bloodwork. These policies often offer more competitive rates than mortgage protection and work well if you have health concerns or want to avoid medical tests.

What happens if you move or switch lenders

Here’s something important to consider. If you sell your home, switch lenders, or refinance, your mortgage protection ends. Term life insurance stays with you no matter what changes you make to your housing situation.

With term life insurance, you control who gets the money and how it’s used. Mortgage protection designates the lender as the sole beneficiary.

When mortgage protection might work

Mortgage protection can work for those who need extremely quick approval with minimal health questions. If you have significant health challenges and cannot qualify for other coverage, it might be your only option.

But for most Canadian homeowners, term life insurance offers better value and more flexibility.

Finding the Right Coverage for Your Situation

When you’re ready to choose between life insurance and mortgage protection, you’ll want to look at your complete financial picture. How much debt do you have beyond your mortgage? What would your family need if something happened to you?

Calculating How Much Coverage You Need

Start by adding up your mortgage balance and other significant debts. Many financial advisors suggest getting coverage that equals at least your home’s value, but your specific needs matter more than general rules.

If you have a $300,000 mortgage plus $50,000 in other debts, you might want $350,000 in coverage. But consider your family’s ongoing expenses too. Would they need money for daily living costs, children’s education, or other priorities?

Life insurance gives your beneficiaries the flexibility to use the death benefit however they need. Mortgage protection only pays the lender.

Term Life vs Permanent Life Insurance

For most Canadian homeowners, term life insurance makes the most sense. You can choose a term that matches your mortgage length – 20 or 25 years, for example. Term life costs less than permanent coverage while still providing the protection your family needs.

Permanent life insurance might be worth considering if you’ve already maximised your RRSP and TFSA contributions and want to build cash value. But for mortgage protection specifically, term life usually offers better value.

What to Consider Before You Decide

Here’s what matters when choosing between your options:

• Term life insurance stays with you if you move house or switch lenders

• Non-medical life insurance is available if you have health concerns

• Mortgage protection ends when you pay off your mortgage or change lenders

• Life insurance premiums stay the same while coverage remains constant

• Mortgage protection premiums stay the same while coverage decreases over time

Getting Help from an Insurance Broker

At Maple Bay, we work for you, not the insurance companies. That means we can compare policies from multiple providers to find the best coverage at the right price for your situation.

Brokers understand the details of different policies and can explain options you might not know about. We can also help you find non-medical coverage if health issues are a concern.

When you’re ready to protect your family and your mortgage, we’re here to guide you through the process.

Making the Right Choice for Your Family

When you’re choosing between life insurance and mortgage protection, remember that flexibility makes all the difference. Term life insurance gives your family control over the money when they need it most. They can decide whether to pay off the mortgage, handle other debts, or cover daily living expenses.

The numbers speak for themselves. Term life insurance typically costs less than mortgage protection and provides consistent coverage throughout the policy term. With mortgage protection, you pay the same premiums even as your coverage decreases with each mortgage payment you make.

If you’re worried about medical exams, don’t let that stop you from considering life insurance. Many term life policies are available without medical tests, and they still offer better value than mortgage protection.

Your family deserves the freedom to make their own financial decisions during a difficult time. Life insurance provides that freedom, while mortgage protection sends the money directly to your lender.

The choice becomes clearer when you consider what happens if you move, refinance, or switch lenders. Your life insurance stays with you, but mortgage protection typically ends.

At Maple Bay, we understand that choosing insurance can feel overwhelming. We’re not here to push any particular product on you. Instead, we’ll help you understand your options and find coverage that fits your family’s needs and budget.

Contact us today to discuss your situation, or fill out our quick “Request a Quote” form to receive a no obligation quote that make sense for your circumstances.