Mortgage Life & Disability Insurance
When you apply for, renew or refinance a mortgage, you may be offered optional mortgage life, critical illness, disability or job-loss insurance.
You may also hear it described as creditor insurance or credit-and-loan insurance.
Some borrowers decline immediately because they want to keep their monthly costs down. Others accept because the protection sounds reassuring.
Neither decision should be automatic.
The better questions are:
- What financial risk am I trying to protect against?
- What coverage do I already have?
- What would this particular product pay?
- Do its terms fit my household and circumstances?
The insurance offered during the mortgage process can be useful for some borrowers and unnecessary for others. The right answer depends on your income, dependants, savings, employment, existing insurance and the actual certificate of insurance.
The quick answer
Before deciding, remember:
- Mortgage life, disability and critical illness insurance are generally optional. You do not have to purchase them to receive mortgage approval.
- They are different from home insurance and mortgage default insurance.
- Coverage, eligibility, exclusions and benefit limits vary by product.
- Compare the offer with any protection you already have through work or a personal policy.
- Ask for a sample certificate of insurance before enrolling.
- Personalized product recommendations should come from a properly licensed insurance professional.
The Financial Consumer Agency of Canada provides a helpful overview of optional mortgage insurance products.
First, understand the three different kinds of insurance
The term “mortgage insurance” can refer to very different products.
Home insurance
Home insurance protects the property against covered losses such as fire or certain types of damage. A mortgage lender will normally require confirmation of adequate property insurance before funding the mortgage.
Mortgage default insurance
Mortgage default insurance protects the lender if the borrower defaults. It is typically required when the buyer’s down payment is below 20%, although lenders may require it in other circumstances.
It does not pay your family’s mortgage because you die, become ill or cannot work.
Optional mortgage life, disability or critical illness insurance
Optional mortgage insurance may repay an insured mortgage balance or make covered mortgage payments following a qualifying event such as death, disability or critical illness.
The exact event, amount, duration and eligibility requirements depend on the product.
Having home insurance or mortgage default insurance does not mean you already have this type of borrower protection.
1. What would happen if one household income disappeared?
Begin with your household—not the insurance brochure.
Suppose you died unexpectedly or could not work for several months because of an illness or injury.
Could the remaining income cover:
- the mortgage payment;
- property taxes and utilities;
- groceries and childcare;
- vehicle payments;
- home maintenance;
- medical or caregiving costs; and
- credit cards or other loans?
Protection may deserve a closer look when:
- the household depends mainly on one income;
- one borrower earns substantially more than the other;
- there are children or other dependants;
- the family has limited emergency savings;
- the other borrower could not comfortably carry the mortgage alone; or
- one or both borrowers are self-employed and do not have substantial workplace benefits.
That does not automatically mean the mortgage-linked product is the best solution. It means there is a genuine financial risk worth addressing.
2. What life or disability coverage do you already have?
Before purchasing anything new, take an inventory of your existing protection.
You may already have:
- life insurance through your employer;
- short- or long-term disability benefits;
- a separate term or permanent life policy;
- personal disability or critical illness insurance;
- coverage through a spouse’s benefits plan;
- savings or investments; or
- other assets your household could access.
Do not assume workplace coverage is sufficient simply because it exists.
Check:
- the amount of the life insurance benefit;
- the percentage of income replaced by disability coverage;
- any waiting period;
- how long benefits continue;
- whether the benefit is taxable;
- whether coverage ends when you leave your job; and
- whether it protects only you or also covers your spouse.
The Financial Consumer Agency of Canada recommends comparing optional mortgage insurance with employer and personal coverage. Its guides to life insurance and disability insurance can help you understand the basic differences.
3. What does the product pay—and who receives the benefit?
Different insurance products can use similar language while working quite differently.
Mortgage life insurance
Mortgage life insurance may pay some or all of the insured outstanding mortgage balance to the lender following a covered death, subject to the policy’s terms and limits.
Under a typical mortgage life policy:
- the lender is the beneficiary;
- the payment is applied to the mortgage;
- the potential death benefit declines as the mortgage balance declines; and
- premiums generally remain the same even as the balance is paid down.
Paying off the mortgage can still provide a major benefit to a surviving family. It may allow them to remain in the home without carrying the same monthly payment.
However, the family does not ordinarily receive the insurance proceeds to use for other expenses.
Separate personal life insurance
With many term or permanent life insurance policies:
- you choose the amount of coverage;
- you name the beneficiary; and
- the beneficiary can decide how to use the proceeds.
The funds might be used to pay off the mortgage, replace income, cover childcare, pay other debts or address another need.
Neither arrangement is automatically right for everyone. They simply provide different forms of protection and control.
Mortgage disability or critical illness insurance
Mortgage disability or critical illness insurance may make some or all of the covered mortgage payments directly to the lender after a qualifying illness, injury or diagnosis.
It may include:
- a waiting period before benefits begin;
- a maximum monthly payment;
- a maximum benefit period;
- a defined list of covered illnesses;
- employment requirements; and
- medical or other exclusions.
It is generally designed around the mortgage obligation—not necessarily all of the income or household expenses you may lose. Read the actual certificate rather than relying on the product name.
4. How does the product define disability, illness or job loss?
This question is especially important for sole proprietors, contractors, seasonal workers and people with variable employment.
Ask:
- How does the policy define disability?
- Must I be unable to perform my present occupation, or any suitable work?
- Is partial disability covered?
- Which critical illnesses are included?
- How long is the waiting period?
- What is the maximum monthly benefit?
- How long can payments continue?
- Does job-loss protection apply to self-employed people?
- Are contract or seasonal workers eligible?
- What happens if I resign?
- What happens if I am dismissed for cause?
- Does coverage apply when a fixed-term contract simply ends?
A self-employed borrower may have a greater need for income protection because there is no employer benefit plan. At the same time, that person must not assume that every job-loss or disability product covers self-employment or a decline in business income.
Definitions can vary between insurers and even among policies offered by the same insurer.
5. What is excluded—and how would you make a claim?
Ask for a sample certificate of insurance before enrolling.
You do not have to purchase the insurance to request a sample. The certificate should explain:
- eligibility requirements;
- premiums;
- maximum benefits;
- covered events;
- pre-existing-condition provisions;
- exclusions;
- waiting periods;
- age limits;
- claim procedures and deadlines;
- when coverage begins and ends; and
- how to cancel.
Pre-existing conditions or symptoms may affect eligibility or whether a future claim is covered. The wording varies by product, so do not assume that one policy works like another.
Health and eligibility questions should also be answered completely and accurately. Incorrect or incomplete information can affect whether coverage remains valid or whether a claim is paid.
The federal credit or loan insurance guide explains what to look for in the certificate and why the definitions and exclusions matter.
6. What happens if you renew, refinance or switch lenders?
A mortgage rarely remains unchanged throughout the entire amortization period.
You may eventually:
- renew your mortgage;
- refinance to change its terms or access equity;
- switch lenders;
- increase or reduce the balance;
- sell the property;
- port the mortgage to another home;
- add or remove a borrower; or
- repay the mortgage early.
Before accepting coverage, ask:
- Does it continue if I switch lenders?
- Does it end when the original mortgage is discharged?
- Would I need to apply again?
- Would replacement coverage be priced using my age at that time?
- Could a future change in health affect my eligibility?
- Does the benefit change if the mortgage balance changes?
- Can the coverage move to another property?
Do not assume that mortgage-linked insurance automatically follows you.
A renewal or refinance is also a useful time to review any existing coverage. Your income, employment, family, health, savings and mortgage balance may have changed since you first made the decision.
For more on reviewing the complete mortgage—not only the rate—read It’s More Than Just the Interest Rate: What Every Homeowner Should Know About Mortgage Renewals.
7. What is the complete cost—and what alternatives have you compared?
An optional insurance premium may appear manageable when it is added to a regular mortgage payment.
However, the monthly premium is only one part of the decision.
Ask:
- How much could I pay over the expected mortgage term?
- Will the premium increase as I get older?
- Does the available benefit decline as the mortgage balance declines?
- Does the product duplicate coverage I already have?
- How does it compare with a separate term life policy?
- Would personal disability coverage protect more than the mortgage payment?
- Could an emergency fund cover a short interruption in income?
- Do I need life protection, disability protection, or both?
Mortgage-linked insurance may be convenient and may suit some households. Separate personal insurance may offer greater flexibility in the benefit amount, beneficiary or use of the proceeds.
There is no universal answer—and no responsible basis for claiming that one option is always cheaper or better.
Compare the actual products, certificates and quotes available to you. For personalized recommendations, deal with an appropriately licensed professional.
The Insurance Councils of Saskatchewan licensee search can be used to confirm an individual or agency’s licence.
When should you pay especially close attention?
It may be particularly important to review your protection when:
- your family could not comfortably carry the home without your income;
- you have children or other dependants;
- you have little or no workplace life or disability coverage;
- you are self-employed;
- you have limited emergency savings;
- one borrower could not maintain the mortgage alone;
- remaining in the home would be a major family priority; or
- your family, employment or financial circumstances have recently changed.
A need for protection does not automatically mean that the policy attached to the mortgage is the best choice. It means the risk deserves a deliberate plan.
When might someone reasonably decline it?
Someone may reasonably decide not to purchase the optional mortgage product when:
- existing life and disability coverage adequately addresses the risk;
- workplace benefits, savings and other assets provide sufficient protection;
- no one depends financially on that person’s income;
- the household could comfortably continue the mortgage payments;
- selling the property would be an acceptable outcome;
- the policy’s exclusions significantly limit its usefulness; or
- another form of protection better matches the household’s needs.
Declining mortgage insurance does not necessarily mean ignoring the risk. It may mean the household has already addressed it another way.
Your five-minute checklist
Before accepting or declining coverage, ask:
- What type of insurance is being offered?
- Is it life, disability, critical illness, job loss or a combination?
- What event triggers a benefit?
- Who receives the payment?
- What is the maximum benefit?
- What waiting periods, limits and exclusions apply?
- Are pre-existing conditions addressed?
- Would self-employment affect eligibility?
- What happens if the mortgage changes or moves?
- How does it compare with the protection I already have?
The bottom line
Optional mortgage life or disability insurance can be helpful for some borrowers and unnecessary for others.
The best answer is not automatically yes.
It is not automatically no.
It is the decision you reach after understanding:
- the financial risk your household faces;
- the protection you already have;
- the complete cost;
- the actual policy terms; and
- the alternatives available to you.
As a mortgage broker, I can explain where the optional insurance question appears in the mortgage process and help you understand how a renewal, refinance or lender change may affect your mortgage. Product-specific insurance advice and personalized recommendations should come from a properly licensed insurance professional.
Have a mortgage question?
Whether you are buying your first home, renewing or refinancing, I can help you understand your mortgage options and the trade-offs involved.
Contact Mike Huys to start a no-obligation conversation.
This article provides general educational information and is not individualized insurance, legal or financial advice. Insurance availability, eligibility, premiums, benefits, definitions, exclusions and claims requirements vary by insurer and product. Review the applicable certificate of insurance and obtain advice from an appropriately licensed professional before making an insurance decision.
