Mortgage life insurance — term vs bank

Bank mortgage insurance vs term life — what your bank won't volunteer

When you close a mortgage in Canada, your bank will offer “mortgage life insurance” — also called creditor insurance. It's convenient, fast, and almost always the wrong choice. A regular T20 or T25 term life policy with the same coverage typically costs 30–60% less and gives your family a real lump sum, not a paid-off mortgage that goes to the bank.

Five differences that matter

• Who gets paid: bank policy pays the bank (mortgage gets cleared); term policy pays your named beneficiary (family decides what to do)
• Declining coverage: bank policy coverage drops as your mortgage balance drops, but premiums often stay flat; term policy keeps the original face amount the whole period
• Underwriting timing: bank policies are typically post-claim underwritten — they ask only a few health questions at signup but investigate at the time of claim, and a high percentage of claims get denied; term policies are fully underwritten upfront with a paramedical exam, so claims rarely get disputed
• Portability: switch banks or renew with another lender, bank policy disappears; term policy stays with you regardless of what your mortgage does
• Cost: term is typically 30–60% cheaper at the same coverage

Worked example — 38-year-old non-smoker, $540k coverage, 25 years

• Bank mortgage insurance: ~$120/month × 300 months = ~$36,000 lifetime
• T25 term life policy: ~$75/month × 300 months = ~$22,500 lifetime
• Savings: ~$13,500 over the period, plus your beneficiary gets the full $540k (not a paid-off mortgage)

When bank mortgage insurance is the right choice

• You have health conditions that would make traditional underwriting expensive or impossible
• You need coverage tomorrow and a paramedical exam will take 4–6 weeks
• The bank is using it as a rate concession (rare — usually they upsell you AT the rate)

How much coverage do you actually need?

A common rule: 10× annual income for the primary earner, or enough to clear all debts + 12–24 months of household expenses + child education costs. Don't buy “just enough to cover the mortgage” — that ignores the rest of household needs.

How to shop

• Get 3 quotes — independent broker (PolicyMe, PolicyAdvisor), direct from a carrier (Canada Life, Manulife), and an in-person broker
• Compare T20 vs T25 vs T30 — longer term costs more but locks in rates while you're young + healthy
• Look for “convertible” term — lets you convert to permanent insurance without re-qualifying medically later
• Disclose everything honestly — denied claims for non-disclosure are devastating

Related

• Mortgage payment
• Mortgage default insurance (CMHC)
• Net worth tracker
• Down payment + CMHC