Mortgage insurance from the bank versus your own term policy

Two products doing a similar-looking job

Sign a mortgage in Canada and you will almost certainly be offered life insurance on it before you leave the room. It is optional. Lenders can require property insurance and, on a high-ratio mortgage, default insurance, but life coverage on the borrower is a separate product you can decline.

The alternative is a personal term life policy, which you buy yourself and which is not attached to the loan at all.

Both would clear the mortgage if you died. Almost everything else about them differs.

The differences that matter

The declining benefit

This is the difference people notice first once it is pointed out. Creditor coverage insures the outstanding balance, so it shrinks every month as you pay down principal. Twelve years into a mortgage, the amount payable is a fraction of what it was at the start.

The premium usually does not follow it down. You keep paying a similar amount for a benefit that keeps getting smaller.

A term policy is level. Buy $500,000 and it stays $500,000 for the whole term, whatever the mortgage balance is. Once the mortgage falls below the coverage amount, the surplus goes to your family rather than evaporating.

Decreasing term insurance, a personal policy whose benefit falls on a set schedule, does exist. It is uncommon in Canada as a standalone purchase, largely because level term is priced closely enough that most people take the level version.

Who receives the payment

Creditor insurance pays the lender. That is the whole design. The mortgage is cleared and the household keeps the house.

A personal policy pays your named beneficiary, and they decide what to do with it. Usually they clear the mortgage, and sometimes clearing it is not the right move. A surviving spouse who has lost half the household income might be better served keeping a low-rate mortgage in place and using the money for living costs while they work out what comes next. Creditor insurance does not offer that choice.

The money also arrives differently. A benefit paid to a named person normally passes outside the estate, which matters for probate and creditor exposure.

When your health gets assessed

This is the part with the sharpest edge.

A personal life insurance application is underwritten before the policy is issued. The insurer asks its questions, may order a paramedical exam or your doctor’s records, and then makes a decision. Once the policy is in force you know where you stand, subject to the ordinary contestability period.

Several creditor products work the other way. The application is a short set of health questions at the branch, coverage begins straight away, and the answers are examined properly only if a claim is made. If the review then finds the questions were answered incorrectly, the claim can be reduced or refused, and the family finds out at the worst possible moment.

This is not universal. Products differ between lenders and some are underwritten up front. What matters is knowing which kind you have been offered, and the way to find out is to ask directly whether the coverage is medically underwritten at application. Get the answer in writing. Then answer every health question completely, whichever product you choose, because an incomplete answer is what puts a claim at risk in either case.

Portability

Mortgages get moved. People switch lenders at renewal for a better rate, refinance to consolidate debt, or sell and buy again.

Creditor coverage generally does not travel. It is attached to that loan with that lender, and a new mortgage means a new application, at whatever age you have reached and in whatever health you are now in. Someone who took creditor insurance at 34 and switches lenders at 47 after a diagnosis may find the new application does not go the way the first one did.

A personal policy is indifferent to all of it. It covers you, not the debt.

Where creditor insurance is genuinely the better option

It is not always the wrong answer.

Someone who would struggle to get individually underwritten coverage, because of a recent diagnosis or a history that makes a full application difficult, may find that a short-questionnaire creditor product is available where a personal policy is not. Coverage that pays the lender is better than no coverage.

It is also fast. If a closing date is days away and there is no time to underwrite a personal application, taking the lender’s product to get something in place is reasonable. You can apply for personal coverage afterwards and cancel the creditor policy once it is issued.

The usual recommendation, and its limits

For most people in reasonable health, a level term policy sized to the mortgage plus the household’s other needs, owned personally and naming a person as beneficiary, covers more, keeps its value, and travels with you.

That is not a universal answer. If your health makes individual underwriting uncertain, or you need coverage in place this week, the calculation changes. The way to find out which situation you are in is to apply and see what comes back, which costs nothing and commits you to nothing.