Mortgage Protection Insurance vs Life Insurance: What’s the Difference?

Life is unpredictable. While you can’t plan for everything, you can take steps to protect your family from financial risk. Having the right insurance can provide peace of mind and help ensure your loved ones are cared for.

While most Canadians (58 per cent) agree that life insurance is important, only 39 per cent have a policy in place, according to a recent study by RBC Insurance. This gap may reflect some uncertainty around how insurance works and what different types of policies cover.

To help clear up the confusion, we’ll compare mortgage protection insurance and life insurance. Understanding the differences between these coverages can help you make a more informed decision about the type of insurance that’s right for you.

This article will explore the benefits and drawbacks of each type of coverage, and which policy might make the most sense in different situations.

Key messages

• Mortgage protection insurance can help cover your mortgage payments or pay down your balance if you become ill, injured, or pass away.

• With mortgage protection coverage, your mortgage lender is the beneficiary, and the payout can only be used to pay off your mortgage.

• Life insurance provides a lump sum, tax-free benefit that your chosen beneficiaries can use as they see fit.

• For young and healthy individuals, a term life policy is often more cost-effective than mortgage protection insurance.

• When trying to determine your insurance needs, consider factors, like your age, health, financial obligations, and personal circumstances. 

What is mortgage protection insurance?

Mortgage protection insurance, also called mortgage life insurance, is an optional type of coverage that can help pay your mortgage balance if you pass away. Some policies offer add-on critical illness and disability coverage to help you cover your monthly payments for a set period.

Mortgage protection insurance is different than mortgage default coverage, which is required by the Government of Canada for homeowners who put less than 20 per cent down when buying a home.  While mortgage protection insurance offers protection in the event of death, critical illness, or disability, default insurance protects the lender if you  can’t make your mortgage payments.

What is life insurance?

Life insurance can help your family and loved ones manage the financial impact of your death. Your chosen beneficiaries will receive a one-time, tax-free payment called a death benefit, which they can use in any way they choose.

When purchasing a life insurance policy, there are two main types: term life or permanent.

Term life insurance

Term life insurance is a temporary form of coverage that’s offered for a fixed term, such as 10 or 20 years, or until you reach a certain age, such as 65. If you pass away within the policy term, your beneficiaries will receive a death benefit. 

Term life insurance is generally a more affordable type of coverage and offers fixed payments for the length of your chosen term.  When your term ends, you can choose to renew your coverage at a new rate.

Permanent insurance 

Permanent life insurance provides protection for your entire lifetime. When you pass away, your beneficiaries receive a tax-free death benefit. Some types of permanent life insurance, such as whole life insurance allow you to build cash over time, with part of your premium going to the cost of insurance and the rest going into savings.

While whole life insurance is generally more expensive than term life coverage, it offers predictable premiums, lifetime protection, and the potential to build cash over time.

Key differences between mortgage protection insurance and life insurance

When you’re trying to find the best coverage for your loved ones, it’s important to understand how mortgage protection and life insurance compare. Here are some of the key differences to consider.

Purpose

Mortgage protection insurance: Can help towards paying your outstanding mortgage balance if you die. Depending on the plan you choose, it may also help cover your monthly payments for a set period if you become critically ill or disabled.

Life insurance: Provides your beneficiaries with a one-time, tax-free death benefit when you pass away that they can use for any purpose, including helping to pay off a mortgage. 

Beneficiary

Mortgage protection insurance: The mortgage lender is the beneficiary and receives the death benefit should you pass away.

Life insurance: You get to choose your beneficiary, and the death benefit is paid directly to them tax-free. 

Flexibility

Mortgage protection insurance: Limited flexibility, as this type of insurance can only be used to pay off your mortgage and unlike some types of life insurance does not provide the option for earning dividends or cash value guarantee.

Life insurance: Offers more flexibility. Your beneficiaries can use the death benefit however they want, from covering funeral expenses to paying off debt, or trying to replace lost income. Some forms of permanent life insurance also offer the potential to earn dividends or access the cash value accumulated in your policy. 

Cost

The cost of premiums for mortgage protection insurance and life insurance will be unique to you. However, term life insurance can be more cost-effective for younger and healthier individuals.  Term life insurance may also provide more value than mortgage protection life insurance since it doesn’t decrease over the term of the policy.

Coverage amount

Mortgage life insurance: Coverage amount tends to be lower than life insurance. For example, RBC’s HomeProtector Insurance provides coverage up to $750,000 in the event of death. The amount of coverage paid out also decreases as you pay down your mortgage balance, and coverage ends when you pay off your mortgage.

Life insurance: Life insurance can provide up to $25 M in coverage, depending on your needs. Coverage remains the same throughout the term of your policy, whether you choose term or permanent life insurance.

Policy owner

Mortgage protection insurance: Your mortgage lender is the owner of a mortgage protection insurance policy.

Life insurance: When you purchase life insurance, you are the policy owner.

Pros and cons of mortgage protection insurance vs life insurance 

As with any financial decision, there are pros and cons to consider when you’re trying to decide which option is right for you.  Here’s the pros and cons of mortgage protection insurance and life insurance.

When should you choose mortgage protection insurance?

You might decide mortgage protection life insurance is the right choice for you and your family if you: 

• Have health issues. A history of health concerns could make life insurance difficult or too expensive to obtain.

• Want simple enrollment. You don’t want to go through the process of completing an extensive health exam.

• Want quick approval. Some mortgage insurance applications, like the HomeProtector® Insurance from RBC, could be approved as soon as the same day you apply. 

Already have life insurance. Even if you already have life insurance, you might choose to have extra mortgage insurance in case of death.

When should you choose life insurance?

Life insurance offers more flexibility and value. You might choose a life insurance policy if you:

• Value flexibility. You want your beneficiaries to choose how they use the death benefit. 

• Have other debts. If you have credit card debt, student loans, or other expenses that you need to cover beyond your mortgage.

• Have dependents. You want to protect your spouse, children, or other loved ones who rely on your income.

• Want to leave a financial legacy. Life insurance gives you the ability to  pass down money to your children or grandchildren or a charitable organization. 

If you’re unsure about life insurance or don’t want to go the process of applying just yet, you can get mortgage protection insurance first and re-evaluate your needs later.

How to choose the right option for you

Trying to decide the type of insurance is right for your needs and budget can feel complicated. To help simplify the process, here are some actions you can take :

• Assess your needs: Your insurance needs can change based on your circumstances. When choosing coverage, consider factors like your age and current health. Also, think about your financial obligations – now and in the future. Do you have a mortgage, debt, or dependents? Will you need to pay for post-secondary education?

• Compare costs: Get quotes for both mortgage protection and life insurance, then compare the long-term costs and benefits.

• Seek professional advice: Consider speaking to an accredited insurance broker. They can help you compare polices to find the one that’s best for your needs and budget. 

• Read the fine print: Before you select an insurance policy, make sure you read through the terms and conditions and understand how the insurance product works and whether there are any exclusions you should be aware of.

Choose the insurance product that’s right for you

The best coverage for you and your loved ones will depend on your individual needs and financial obligations. Mortgage protection life insurance provides a simple and straightforward solution to help ensure your home is paid off if you pass away. Life insurance offers more flexible financial protection for your loved ones.

Before deciding, take time to carefully weigh the pros and cons of each option and consider how they fit into your overall financial plan. No matter what you choose, having an insurance policy in place can provide peace of mind knowing your loved ones are financially secure, no matter what the future holds.

FAQs about mortgage protection insurance vs. life insurance

Can I have mortgage protection insurance and life insurance?

Yes, you have both mortgage protection insurance and life insurance. A mortgage protection policy is designed to help pay off your mortgage balance, while a life insurance policy provides your beneficiaries with a tax-free death benefit that they can use however they choose.

Do I need life insurance if I have mortgage protection insurance?

No, you don’t need to have life insurance and mortgage protection insurance, but you might choose to carry both, since they serve different purposes.

Life insurance provides a tax-free, lump-sum payment, called a death benefit, to your beneficiaries. They can use the benefit however they choose, to pay off the mortgage, cover debt, or replace lost income.

Mortgage protection insurance will help pay off your outstanding mortgage balance if you pass away or provide temporary payments if you are diagnosed with a critical illness or disability.

Is mortgage protection insurance cheaper than life insurance? 

The cost of premiums for mortgage protection insurance and life insurance is unique to you. Mortgage protection insurance could become more expensive than term life coverage, especially if you’re young and healthy.  Life insurance might also provide better value than mortgage protection insurance, as the death benefit doesn’t decrease over the term of the policy.

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