Bank coverage or your own policy?

Who owns the policy

With the bank's coverage, the lender owns a group policy and you are one of many people insured under it. The Financial Consumer Agency of Canada puts the key point plainly: the mortgage lender is the beneficiary of any mortgage life insurance policy. The money goes to the lender, and the lender applies it to the balance.

With your own policy, you are the owner. You choose the amount, the term and the beneficiary, and you keep the policy if you change lenders. The comparison above sets out the five points that matter most, and you can see your own estimate in about two minutes.

One thing this page is not about: mortgage default insurance from CMHC, Sagen or Canada Guaranty. That is the coverage required when a down payment is under 20%, and it protects the lender if you stop paying. Everything below is about the optional life insurance offered alongside the mortgage.

The claim problem

The usual route into the bank's coverage is a short health questionnaire of yes or no questions, and the agency notes that insurers may approve you right away on the strength of it, though for larger amounts or older applicants they may ask for a medical exam first. That speed is real, and so is the trade-off. The insurer still relies on those answers, and the agency is blunt about the consequence: your insurance will not be valid if you do not provide accurate answers to the questionnaire.

In practice, that means the health review can happen after a claim rather than before the policy is issued. The industry name for that sequence is post-claim underwriting, and it is the single most important idea on this page.

A fully underwritten individual policy front-loads the work instead. The medical questions, and sometimes a nurse visit or a report from your doctor, happen before the policy is issued. That does not make a policy uncontestable, and nobody should tell you it does. Under Ontario's Insurance Act an insurer can contest a life policy for a failure to disclose or a misrepresentation during its first two years, and misrepresentation that amounts to fraud can be contested at any time. What changes is the order of the work: on an underwritten policy the questions were asked, answered and assessed while you were there to answer them, rather than reconstructed from a file after a death.

That is also why the agency's guidance on any application is worth reading twice. Answer every question completely and honestly, because if you do not, the company could cancel the policy or refuse a claim later.

Switching lenders and paying down

Bank coverage is written around one mortgage with one lender, so renewing elsewhere, refinancing or discharging the mortgage can end it, and the certificate sets out exactly when. What happens at renewal, refinance, or when you move goes through each event in turn.

Your own policy is attached to you. Renew with anyone, move to a new city, pay the mortgage off ten years early, and nothing about the policy changes until the end of its term.

When bank coverage might still make sense

Two honest cases.

The first is timing. There can be a few weeks between closing and your own policy being in force. Taking the bank's coverage for that window, and cancelling once your policy is issued, is a sensible use of it.

The second is health. If a medical condition makes an individually underwritten policy hard to get, the bank's simplified coverage may be the option that is open to you. It is better than nothing, as long as you understand that the questions on that short form still matter at claim time.

What shrinks and what stays level

Bank coverage is sized to the mortgage, so it follows the mortgage down. The agency notes that the death benefit decreases as you make payments and reduce your outstanding balance, while the premiums generally stay the same even though you owe less over time.

Your own policy is sized to your family. On the $500,000 mortgage in the table below, a $500,000 level policy pays $500,000 in year one and $500,000 in year 18, when the mortgage itself has about $207,000 left on it. If the mortgage is smaller by then, the difference is still your family's money, available for the things a mortgage payment does not cover: childcare, a year without a second income, tuition.