Mortgage Life Insurance at Signing: What Multiplex Buyers Are Offered and How to Decide

On the day you sign your mortgage documents, somewhere between the interest rate and the pen, the lender will offer you insurance. It will be called mortgage life insurance, or mortgage protection, or creditor insurance, and it will be presented as the responsible thing to add. Many buyers say yes because they are tired and the form is already printed. This guide is here so that a multiplex buyer knows what is being offered before that moment arrives.

We are a real estate marketplace. We are not insurance advisers, and nothing here is a recommendation for or against any policy. What we can do is explain the words, point you at the federal consumer agency's own description, and give you the questions to ask.

Two things called mortgage insurance

The confusion starts with the name, because two different products get called "mortgage insurance" and only one of them is a choice.

Mortgage default insurance is the one you have probably heard of. When your down payment is under 20 percent of the price, Canadian lenders require the mortgage to be insured by CMHC or a private insurer. It protects the lender if you stop paying. The premium is a percentage of the loan and is usually added to the mortgage balance. According to CMHC, the premium is 4.00 percent when you borrow between 90.01 and 95 percent of the price, which is the 5 percent down payment case, and 3.10 percent when you borrow between 85.01 and 90 percent. Our guide to buying a multiplex home with 5 percent down works through the arithmetic. You do not choose this insurance. If your down payment is under 20 percent, you have it.

Mortgage life insurance is the one this post is about. The Financial Consumer Agency of Canada describes it as "a type of credit and loan insurance that you're usually offered when you take out or renew a mortgage," and states plainly: "You don't need to purchase optional mortgage insurance to be approved for a mortgage." It pays off your mortgage balance if you die. It is optional, and a lender that suggests otherwise is wrong.

Keep the two apart in your head. One is a cost of borrowing with a small down payment. The other is a product being sold to you.

What mortgage life insurance does

If you die while the policy is in force, the insurer pays the remaining mortgage balance to the lender. Your household keeps the home with no mortgage on it.

Three features shape whether that is good value for you. All three come from the federal agency's own description.

The lender is the beneficiary. In the agency's words, "The mortgage lender receives the death benefit, not your family or heir(s)." The money goes to clearing the loan. Your family does not get a cheque to decide what to do with.

The benefit shrinks. The premium does not. The agency: "The amount of the death benefit is equal to your outstanding mortgage balance. The death benefit decreases as you make mortgage payments and reduce your outstanding balance." And: "As you pay down your mortgage, the premiums generally remain the same, even though you'll owe less on your mortgage over time." You pay a level price for a benefit that gets smaller with every payment.

It is tied to the mortgage. Move the mortgage to another lender and the policy usually ends. Pay the mortgage off and the policy ends. Our post on porting a mortgage to a new home covers what moves with you and what does not; creditor insurance is often on the "does not" list.

What term life insurance does instead

The alternative the agency itself raises is ordinary life insurance. "Term or permanent life insurance may provide better value than mortgage life insurance," it says, because "the death benefit, or amount payable to your beneficiaries, won't decrease over the term of the policy," and "The beneficiary may use the money they received for any purpose."

In plain words: a term policy pays your family a fixed amount, say $800,000, if you die during the term, and your family decides whether to pay off the mortgage, keep paying it and invest the difference, or something else. The premium is set by your age and health when you apply, and you can shop it across insurers. It follows you from home to home and lender to lender.

Term life requires you to apply, answer health questions and sometimes take a medical exam before the policy is issued. Mortgage life insurance from a lender is usually simpler to sign up for at the table, which is part of its appeal and part of what to look at closely.

The question to ask about health questions

When you sign up for mortgage life insurance at the bank, you will typically answer a short set of health questions on the form. Ask this before you sign: is my application fully assessed now, or is my eligibility checked when a claim is made?

The reason to ask is that the answer determines what your family finds out at the worst moment. If the insurer reviews your health history only after a claim, a family can be told that a condition the buyer had at signing disqualifies the payout, after years of premiums. We are not saying that is how your lender's policy works. We are saying it is a fair question, the lender's insurance representative must answer it, and you want the answer in writing. A term life policy that was fully underwritten when it was issued does not carry this uncertainty.

Why this matters more for a multiplex buyer

Most guides to this topic are written for a couple in a condo. A multiplex buyer's situation is often different in three ways, and each changes the decision.

There may be more than one household relying on the same roof. Parents in the ground-floor home, adult children upstairs, a shared plan and, in many cases, a shared or family-assisted down payment. Our Buying Together guide explains the ways families hold title and share a mortgage. If one income disappears, the question is whether the other households can carry their share, and the lender-paid payout on one home does nothing for the family next door. A term policy naming the people who would be left holding the plan is a different tool.

The purchase may be pre-sale, with a completion date a year or more away. Mortgage life insurance starts when the mortgage funds, at completion. Term life can start the day you decide you need it. If your family's exposure begins when you sign the pre-sale contract and pay the deposit, the coverage that begins at completion has a gap at the front.

The mortgage may be large, and the amortization long. A 30-year amortization on an insured mortgage for a brand new home is now available to first-time buyers, and our post on 30-year mortgages explains who qualifies. A longer amortization means the balance falls more slowly in the early years, which narrows the gap between a level premium and a shrinking benefit. It does not remove it.

None of this decides the question for you. It means the "should I take the bank's insurance" conversation deserves ten minutes of thought before signing day, and that a licensed insurance adviser, independent of your lender, is the person to have it with.

What to ask the lender before you decide

• Is this insurance optional, and will declining it change my rate or my approval in any way?
• Who is the beneficiary, and can I name my spouse or family instead?
• How is the premium calculated, and does it change as my balance falls?
• Are my health questions fully assessed at application, or at claim time?
• What happens to the policy if I move my mortgage to another lender, refinance, or pay it off early?
• Is there a free-look period during which I can cancel with a full refund?
• Can I get the policy wording, in full, before I sign the enrolment form?
• If two of us are on the mortgage, does the policy cover both, and does it pay on the first death or the second?

The first question is the one to insist on. In writing, the answer is "yes, it is optional, and no, declining does not affect the mortgage."

How buyers usually decide

Here is what we see, for what it is worth. Buyers who already carry term life insurance, either through work or a policy they bought, generally decline the lender's product because their family is already covered by something more flexible. Buyers who have no life insurance at all sometimes take the lender's product because it is available on the spot, then replace it with a term policy once they have had time to apply. And buyers with health issues that make term life expensive or unavailable sometimes find that the lender's product, with its simpler application, is the coverage they can get, which is a legitimate reason to keep it.

The common thread is timing. The lender's form arrives on the busiest day of the purchase. Make the decision the week before, in daylight, with the questions above answered.

What this comes down to

• Mortgage default insurance from CMHC or a private insurer is required when your down payment is under 20 percent. It protects the lender and you cannot decline it.
• Mortgage life insurance from your lender is optional. The Financial Consumer Agency of Canada states you do not need it to be approved.
• The lender is the beneficiary. The payout equals your remaining balance, which falls over time, while the premium generally stays the same.
• Term life insurance pays your family a fixed amount they control, follows you between homes and lenders, and the agency says it "may provide better value."
• Ask whether health questions are assessed at application or at claim. Get the answer in writing.
• Multiplex buyers with more than one household in the plan, a pre-sale completion date, or a long amortization have extra reasons to think this through with an independent adviser before signing day.

Questions buyers ask about mortgage life insurance

Is mortgage life insurance mandatory in Canada?

No. The Financial Consumer Agency of Canada states that you do not need to purchase optional mortgage insurance to be approved for a mortgage. A lender can offer it and can require you to sign a form declining it, but cannot make approval depend on it.

What is the difference between CMHC insurance and mortgage life insurance?

CMHC mortgage default insurance is required when your down payment is under 20 percent and protects the lender if you stop paying. Mortgage life insurance is optional, pays off your balance if you die, and is sold by the lender at signing. They are unrelated products.

Who gets the money from mortgage life insurance?

The lender. The Financial Consumer Agency of Canada is explicit that the mortgage lender receives the death benefit, not your family. The benefit is applied to the mortgage balance, so your household keeps the home without a mortgage but receives no cash.

Does the premium go down as I pay off the mortgage?

Generally, no. The federal agency says premiums usually remain the same even as the balance, and therefore the payout, falls. You pay a level price for a benefit that shrinks every month.

Is term life insurance better than mortgage life insurance?

The Financial Consumer Agency of Canada says term or permanent life insurance may provide better value, because the benefit does not shrink and your beneficiaries choose how to use it. Whether that holds for you depends on your age, health and family situation, so ask an independent adviser.

Can I cancel mortgage life insurance after I sign?

Usually yes, and many policies include a free-look period with a full refund. Ask the lender for the cancellation terms in writing before you enrol, and check what happens to the policy if you switch lenders or pay off the mortgage early.

What happens to mortgage life insurance if I port my mortgage?

Often the policy ends when the mortgage moves, even if you port to a new home with the same lender. Confirm this before you rely on it. Term life insurance is not tied to any mortgage, so it follows you regardless of what you do with the loan.

Does mortgage life insurance cover both of us on a joint mortgage?

Sometimes, and the details matter: whether both borrowers are covered, whether the premium doubles, and whether it pays on the first death. Ask for the policy wording. In a two-household multiplex purchase, check whether each home's mortgage is covered separately.

When does coverage start on a pre-sale purchase?

Mortgage life insurance starts when the mortgage funds at completion, which for a pre-sale may be a year or more after you sign. If your family's exposure begins when you pay the deposit, only a policy you arrange yourself covers that stretch.

Should I decide at the signing table?

No. Decide the week before, with the questions in this post answered in writing. The signing appointment is the busiest day of the purchase and the worst time to take on a new financial product you have not read.

Does declining the insurance affect my mortgage rate?

It should not, and the lender should confirm that in writing. If any lender suggests that declining optional insurance changes your rate or approval, ask for that statement in writing and consider taking your mortgage elsewhere.

Who can give me actual advice on this?

A licensed life insurance adviser who is independent of your lender. They can compare a term policy with the lender's product against your age, health, mortgage size and the people who depend on you. MultiLiving does not sell insurance and this post is general information only.

Sort the insurance out before you sort the keys out

If you are heading toward a mortgage on a multiplex home, put "decide on life insurance" on the to-do list beside "hire a lawyer" and well ahead of completion. Then browse the multiplex homes for sale to see what your budget buys, or talk to us and we will walk you through the purchase timeline so the insurance decision lands on a quiet day instead of the signing one.