We all encounter the unexpected from time to time. If your household suddenly loses its main earner due to illness, injury, or death, you’d want to ensure that your family was covered for mortgage repayments. Mortgage life insurance is a type of mortgage protection insurance that does just that. With mortgage protection insurance, Canadians can safeguard their homes when the primary earner passes away or is unable to work due to disability or illness. In this post, we’ll help you understand what mortgage life insurance is, how it works, and whether or not you need it. 

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Key Takeaways

• Mortgage protection insurance is a term that includes several products, including mortgage life insurance, and mortgage disability insurance
• In Canada, mortgage protection insurance is not mandatory, but it can help safeguard your family against unforeseen mortgage costs in the event that you pass away or are unable to work
• Mortgage life insurance is not the same as individual life insurance. The former covers mortgages only in the event of death, whereas the latter is a lump sum that goes to a beneficiary, who can then decide how to spend the money
• Mortgage life insurance is not the same as CMHC insurance, which is a mandatory type of insurance in Canada for homes bought with less than a 20% downpayment, and is designed to protect lenders against loan defaults 

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What is mortgage protection insurance?

In Canada, mortgage protection insurance is an overarching term for similar, but slightly different products: mortgage life insurance, and mortgage disability insurance. Mortgage life insurance protects homeowners in a scenario where the primary earner passes away before the mortgage is paid off. Mortgage disability insurance, on the other hand, is a way to insure against a situation where the primary earner is incapable of paying off the mortgage due to unforeseen disability or illness. Ultimately, mortgage protection insurance refers to different types of insurance that protect homeowners against unforeseen injury, illness, and death, which would otherwise make repayments impossible.

Types of mortgage protection insurance coverage

Mortgage Life Insurance

Mortgage life insurance is a non-mandatory insurance that lenders offer, which pays off your mortgage in the event of your death (assuming you’re the primary breadwinner.) In the event of an unexpected death, your loan balance will be paid off in full and your estate will be cleared of any money owing. This type of insurance is specific to mortgage repayments only. 

Mortgage Disability Insurance

In the event of an unexpected disability that renders you unable to pay your monthly repayments, mortgage disability insurance will cover you for the period that you’re unable to work. With some lenders, coverage only begins at the 60 or 90 day mark. Generally, mortgage disability insurance only covers a set period of time in which you are unable to work, like 24 months.

Tip: Mortgage life insurance covers you in the event of death, and will pay off your mortgage entirely if your family cannot make repayments without your income. Mortgage disability insurance will cover your repayments in the event of an unexpected disability or illness, for a set period of time

Is Mortgage Protection Insurance Mandatory in Canada?

No. Mortgage protection insurance is not mandatory in Canada, either in the form of mortgage life insurance, or as mortgage disability insurance. A lender cannot force you to buy an optional product in order to go with them for a mortgage. However, mortgage protection insurance is highly recommended, as unexpected circumstances could change your household income significantly and make repayments more challenging.

Mortgage Protection Insurance Frequently Asked Questions

Here are some of the most common questions we’ve found Canadians want to know about mortgage protection insurance in 2022. 

Is mortgage life insurance the same as individual life insurance?

No. These are two distinct products and should not be confused, even though they sound similar. In the event of your death, life insurance pays out a certain amount to a beneficiary who can then choose what to do with the money. Mortgage life insurance, on the other hand, is tied specifically to your mortgage, and serves to protect your family in the event of your death by covering your entire mortgage only. With life insurance, your beneficiary gets to decide how they will use the money. With mortgage life insurance, on the other hand, only your mortgage is covered in the event of your death, and the money goes directly towards paying it off.

Is CMHC insurance the same as mortgage life insurance?

No. As we’ve covered elsewhere, CMHC insurance – or mortgage default insurance – is for mortgages on homes where your down payment is less than 20%. This type of insurance is mandatory for loans where you will be putting down less than a 20% downpayment, and is designed to give lenders some assurance that they’ll get their money back if you can’t make your payments. Mortgage life insurance, on the other hand, is a product that protects you and your family by paying off your mortgage in the event that you pass away and can’t make repayments.

Does mortgage life insurance coverage depreciate over time?

Yes. Any amount of your mortgage you pay off will reduce your overall coverage by the same amount. Essentially, mortgage life insurance covers you only for what is remaining on your mortgage. If you make a monthly repayment, your policy coverage will go down by that amount. If you make a lump sum or early repayment, the same applies.

Are there alternatives to mortgage life insurance?

Yes. Canadian homeowners can also opt for something known as term life insurance. This type of insurance covers you at a guaranteed rate for a fixed period of time or a specific ‘term’ of years. If the policyholder dies during this period, generally a named beneficiary will receive the full amount of their coverage, which they can use however they want. 

Another alternative to mortgage life insurance is whole life insurance (otherwise known as permanent life insurance). As the name suggests, this type of policy covers you for your entire life, and also pays out to a beneficiary in the event of your death. Whole life insurance is usually set at a guaranteed rate like term life insurance, which won’t increase throughout the duration of your policy. With whole life insurance, your premiums are invested, meaning that your beneficiary will receive a combination of your policy coverage and the value of your invested capital.

How Long Do You Have To Have Mortgage Protection Insurance?

The simple answer is as long as you choose to. Mortgage protection insurance products are not mandatory in Canada, so it’s up to you to decide what kind of policy works best for you. You want your policy to cover you while you pay off the bulk of your mortgage, so that your family is not left financially struggling in the event that you cannot make repayments. It’s also worth noting that if you sell your home and move, your insurance will end on the date you refinance. You would need to apply for protection insurance for the new mortgage at the beginning of the term.

Does nesto offer mortgage protection insurance? 

Yes! We offer both mortgage life insurance and mortgage disability insurance. To learn more, get in touch with one of our Advisors today.

Final Thoughts

While it might not be mandatory, mortgage protection insurance gives you and your family peace of mind that your home will be safe in the event of something unexpected. Whether you choose to go with term life, whole life, or mortgage protection insurance is up to you, and will be dependent on what your situation requires. Ultimately though, mortgage protection insurance can be a great tool to help safeguard your mortgage repayments against unexpected injury, illness, or death. With it, your family will be protected if the worst were to happen, and would not have to struggle with repayments. 

If you’d like to learn more about nesto’s mortgage protection insurance, feel free to get in touch with one of our Advisors today.

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