Mortgage Insurance vs Life Insurance in BC: 5 Questions

The short answer. Mortgage insurance from your lender and a life insurance policy of your own both pay out if you die, but they work differently. The lender's policy pays the lender, and the payout generally shrinks as your mortgage does. A policy of your own pays the people you choose. In many cases personal life insurance serves you better, and the five questions below are worth asking first.

Buying a home usually comes with a pile of paperwork, and one form often asks whether you want mortgage insurance. It's optional, and you don't have to answer on the spot. I'm an independent broker in Kelowna, and these are the questions I'd want answered before anyone signs.

1. Who gets the money?

With mortgage insurance from your lender, the lender is the beneficiary. The payout goes to the lender and is used to pay down the mortgage. With a life insurance policy of your own, you name the beneficiary, and that person can use the money for anything: the mortgage, the bills, childcare, or a bit of breathing room.

2. What happens to the coverage as you pay down the mortgage?

Mortgage insurance generally covers whatever you still owe, so the payout gets smaller as the balance drops, while the premium usually stays the same. A personal term life policy keeps the same amount for the length of the term, even as the mortgage shrinks. That leftover coverage can matter, because your family's needs don't disappear just because a mortgage got paid out.

3. When does the insurer look at your health?

Life insurance usually asks your health questions up front, and once you're approved, the insurer doesn't look into your health additionally unless there is a claim within the first two years - in which case the insurer will verify your application against your medical file at time of passing to check for fraud in your application. After that initial 2 year period of coverage, the insurer generally must pay the claim to the beneficiaries once a death certificate is submitted with the claim, as long as the policy hadn't lapsed (exceptions can apply, such as fraud). Some mortgage insurance policies ask only a few questions at the start and only medically underwrite your health at time of claim. This creates the risk of coverage denial. Ask for the policy certificate, and read the section on how claims are assessed.

4. What if you switch lenders or renew?

Mortgage insurance is tied to the lender. If you move your mortgage, you may need to apply again, possibly at an older age or in different health. A life insurance policy of your own stays with you, whoever holds your mortgage.

5. What coverage do you already have?

Before buying anything, check what you've already got. Many people have life insurance through an employer's group plan. It can be a good base, but it's generally tied to your job, so ask what happens to it if you leave. Add up what you have, then decide what's missing.

Two things people mix up

• Mortgage default insurance (CMHC) is a different product. It protects the lender, not your family, and it's generally required when your down payment is under 20%. It's not the same thing as mortgage life insurance.

• Term life insurance ends. A term policy covers a set period, often 10 to 30 years. When the term ends, the coverage ends unless you renew or convert it, so match the term to how long you'll need the protection.

Frequently asked questions

Do I have to buy mortgage insurance from my bank?

No. It's optional, and the lender can't require it in order to give you a mortgage. You can say no, and you can look at other ways to protect your family.

Is life insurance of my own better than mortgage insurance?

Often yes, however, it depends on your situation. Many people choose personal life insurance because they like the flexibility of choosing their own beneficiary and keeping coverage that doesn't shrink or depend on the lender. Others prefer the initial convenience of mortgage insurance, which can be as simple as initialling a box on the mortgage paperwork. The best choice depends on your health, budget, family, terms and how much coverage you already have.

Does life insurance cover my mortgage if I switch lenders?

A life insurance policy of your own isn't tied to your lender, so it generally carries on if you change lenders or renew. Mortgage insurance from the lender generally doesn't transfer, so you may need to apply again.

Can one personal insurance policy cover more than the mortgage?

Yes. You choose the amount of a policy of your own. Many people cover the mortgage plus other needs, such as income for their family or other debts.

Want a plain look at your own situation?

If you're buying a home or renewing a mortgage in the Okanagan, I'm happy to walk through your options in plain language, with no pressure to buy. Start your free personal insurance cost check (about 3 minutes)

General information only, not advice. Coverage, eligibility and terms vary by insurer and policy, so read the policy and ask questions before you decide.