How much coverage a mortgage really needs

Why the balance is only a starting point

Sizing coverage to the mortgage balance feels precise, and it has one clear virtue: it is easy to explain. It is also how the lender's product works. Optional mortgage life insurance is written against the debt, so the Financial Consumer Agency of Canada notes the death benefit decreases as you make payments and reduce your outstanding balance.

But a household does not stop having costs the moment the mortgage is cleared. Property tax, insurance, utilities and maintenance continue. Childcare continues, and often increases if the surviving parent has to work different hours. If one of two incomes disappears, everything that the second income was quietly paying for has to come from somewhere.

So the balance is the floor of the conversation, not the ceiling.

A method that takes five minutes

What follows is a general illustration of how the arithmetic works, not a recommendation for your household. Sizing coverage properly depends on facts this page does not know, so treat the result as a starting figure to bring to a licensed advisor.

Write down four numbers.

What is owed. The mortgage balance, plus any other debt that would not vanish: a line of credit, a car loan, student debt.

What continues. Pick a number of years the household would need to absorb the shock. Five years is a common answer for a family with young children. Multiply the annual cost of running the home and the family by those years. If that feels like too much arithmetic, one year of the lost income times five is a reasonable stand-in.

What is coming. One-time costs that are already on the horizon: childcare while the surviving parent works, tuition, a funeral.

What you already have. Group coverage through work, any existing policy, savings you would genuinely be willing to spend.

Add the first three, subtract the fourth, and round up to a clean figure. That is your starting number. Then see what it costs, because the price is usually the part people have most badly misjudged.

Be careful with the group coverage at work

Employer coverage is real and worth counting, with two cautions. It is usually a multiple of salary rather than a number chosen for your family, and the agency is clear that group coverage ends when you are no longer a member of the group, or when you reach a certain age. If a large part of your plan rests on it, treat it as a supplement rather than the foundation.

Level coverage changes what the money can do

This is the practical difference between the two approaches, and it only shows up in the later years. A decreasing policy pays what is left on the mortgage. A level policy pays the amount you chose, whatever the balance happens to be.

Take the worked example on the comparison page: a $500,000 mortgage at 5% over a 25-year amortization, with a $500,000 level policy beside it. In year 18 the mortgage has about $207,000 left on it. The decreasing product clears that balance and stops. The level policy clears the same balance and leaves nearly $300,000 with your family, who decide what it is for. That might be two years without a second income while the children finish school. It might be nothing dramatic at all. The point is that they choose.

One more thing the level amount is doing quietly: the agency describes a life insurance death benefit as a one-time, tax-free payment. The number you choose is the number that arrives.

Who the money goes to

Sizing and naming go together, and they are separate decisions. With a policy you own, you name the beneficiary; with the lender's product, the lender is the beneficiary and the money goes to the balance. Naming a beneficiary so the money reaches your family covers how designations work, what to do when a beneficiary is a child, and what to check after a separation or a remarriage.

Does asking for more make it expensive?

Less than people assume. The amount of coverage is one of the things an insurer weighs when setting a premium, so more coverage does cost more, but the relationship is close to proportional and the base cost of issuing a policy is spread across it. Going from $400,000 to $500,000 usually costs less than the extra 25% of coverage suggests.

It is almost always worth pricing the larger amount before deciding you cannot afford it.

What this means for you

Take the five minutes and write the four numbers down. The figure you arrive at is almost never the mortgage balance on its own, because the balance was never a measure of what your household spends.

Then price the number you actually arrived at, not a rounded-down version of it. If it turns out to be affordable, you have sized the coverage to your household. If it does not, you can lower the amount or shorten the term with your eyes open, which is a very different thing from never having asked.