If you are looking for life insurance for the sole purpose of covering your mortgage, the answer is simple: The amount you owe is equal to the amount of coverage you need. Still, most experts recommend digging a little deeper. Why? Because for most Canadians, our mortgage balance is really just the baseline.
It’s always a good idea to consider other debt, like student or business loans, whether you have loved ones who rely on your income, as well as any other financial obligations. Coverage needs can also vary based on income, savings, and existing insurance.
If this feels too complicated to calculate on your own, this article will help lay it all out for you – from doing the math, to reviewing coverage and insurance options, read on!
Key Takeaways
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For most homeowners, the remaining mortgage balance is the starting point for estimating life insurance needs – but it is not always enough.
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A more complete coverage estimate should include the mortgage balance, other debts, final expenses, income replacement, and future family costs – minus savings and existing insurance.
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Mortgage life insurance and individual term life insurance are different: mortgage life insurance is usually tied to the lender, while term life insurance typically pays the beneficiary directly.
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Households with dependants, one primary income earner, limited savings, or significant debt may need coverage beyond what is owed on the mortgage.
Why your mortgage balance is only the starting point
In the event of an unexpected death, using a life insurance payout to pay off the mortgage may keep your home affordable, but it will not replace the income that was lost.
Those left behind must still be able to cover common household costs, like utilities, property tax, childcare, groceries, and education expenses. And then there are other considerations, like the funeral – which is nearly $10,000 on average in Canada, but can also be as high as $20,000.
Baseline coverage vs. the fuller picture
Let’s consider two different scenarios where each household has the same mortgage – and yet very different needs when it comes to their coverage.
Scenario 1: Leslie and Peter
Leslie and Peter live comfortably with their two dogs. They both work full time, and have a household income of approximately $200,000. While they have about $600,000 remaining on their mortgage, they have no problem making the payments on their two salaries. Neither of them has any student debt, and they don’t plan on having children – other than their two fur babies!
They have money set aside as their emergency fund, and some healthy retirement savings to boot, but they still worry that if one of them were to die too soon that the other would find it challenging (if not impossible) to continue paying the mortgage on one salary. That’s why they each decided to get a term life insurance policy that covers half the balance for the next 20 years.
| Leslie: Term 20 coverage for $300,000 Peter: Term 20 coverage for $300,000 |
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Scenario 2: Jane and Matt
Jane and Matt are a hard-working couple raising two young children. Before having kids, they made sure to put some of their monthly paycheques into a savings account, which is harder now with their mortgage payments, the expense of raising two kids, and the fact that Jane works part time since becoming a mom. Jane’s annual salary is now significantly less than Matt’s – but at least they’ve saved on childcare costs!
They sometimes worry about making the mortgage payments and having enough to raise their kids (and save for retirement) if one of them were to pass away. In their case, their advisor recommended income replacement rather than simply covering the mortgage. In order to properly determine their needs, they each multiplied their annual salary with the number of years until retirement.
| Jane: Term 10 coverage for $250,000 ($25,000 x 10 years) Matt: Term 10 coverage for $1M ($100,000 x 10 years) |
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How to calculate life insurance for a mortgage
Now that you have a better understanding of how the factors come together to impact your coverage needs, let’s look at the math.
| In its simplest terms, the formula is: Costs – Accessible Assets = Coverage Needs |
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In order to get a more realistic view of your needs, you’ll need to break it down a little more, keeping in mind that assets like savings and investments need to be accessible to you when you need them.
| Costs | - | Accessible Assets | = | Coverage Needs* |
|---|---|---|---|---|
| Mortgage Balance + Other Debts + Household Costs + Income Replacement + Final Expenses |
- | Savings + Existing Insurance |
= | |
| = | = |
*Note that this calculation can be used as a first step, and should be reviewed with a licensed advisor for making any final decisions about your unique situation.
Costs
Mortgage balance
Because this amount will decline as the mortgage is paid down, it’s usually best to use your current mortgage balance in your calculation – not what you owed when you originally bought the house. If you are hoping to pay off the mortgage more quickly, just be sure to look into any penalties, fees, or costs associated with settling the mortgage early.
Other debts
Here’s where you should be looking into all of those items many of us would rather ignore: check your credit card debt, personal loans, business loans, car loans, lines of credit, and other debt you may have incurred over your lifetime.
Household costs
Consider expenses like groceries, utilities, childcare, education, caregiving, renovations, and the cost of your current lifestyle. Even if the mortgage is paid off, many (if not all) of these costs are financial responsibilities that will not go away for a very long time – or in some cases, ever. Remember that the closer your children are to being independent, the fewer the years you will incur any child-rearing expenses. And if you’re nearing retirement, you may need to think about the cost of maintaining your household without a regular salary coming in.
Income replacement
In a dual-income household, it’s important to consider how both of your salaries contribute to making payments, raising the children, and keeping up your standard of living. For example, if one of you were to pass away unexpectedly, could the other pay the mortgage on a single salary? In cases where the mortgage has been paid off, income replacement can still support day-to-day living costs. Of course, this is just as important – if not more so – in single-income households, in families with young children, or in cases where there’s a large income gap between partners.
Final expenses
When it comes to final expenses in Canada, it can be hard to predict what it could cost. The reality is, it could range anywhere from $15,000 for a modest estate to $200,000 and up for an estate where capital gains tax is owed on a second property. Final expenses may include:
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Final taxes
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Cremation or burial
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Funeral /celebration of life
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Other end-of-life wishes
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Settling the estate
Of course, purchasing life insurance to cover these expenses can give loved ones more flexibility, and more freedom to grieve, without worrying about financial pressures.
Assets
Savings and investments
Your savings can range from money you’ve put aside for emergencies and future family trips, to your children’s education or even retirement. Your investments may not be as easily accessible, but it’s money that is making you money over the years – thanks to interest and time. These could be things like an RRSP, TFSA, RESP, and even a participating whole life insurance policy with an investment component1 called the “cash value2.”
Future inheritance
This can be challenging to predict, which is why it is so important for young adults to be aware of their aging parents’ estate planning and end-of-life wishes. Considering Millennials and Gen Z are set to inherit an estimated $1 Trillion collectively in the next several years, it seems only fair to be aware of what is coming to you so you can plan properly for the future.
Existing insurance
While you may have insurance coverage through work, it’s important to understand its limitations – most importantly that it may not be enough and that it will not come with you if you change or lose your job. If you already have a small whole life policy from childhood or an inexpensive term policy from your early career days, make sure to include these in your calculations. And it’s always a good idea to confirm who you have listed as your beneficiary – designations can change over the years, which is why reviewing existing coverage after a major life change is recommended.
Is life insurance required to get a mortgage?
Life insurance is optional, but remember: There’s a difference between covering your mortgage balance versus protecting the members of your household.
While mortgage life insurance has one purpose (i.e., to cover the outstanding mortgage balance if you die before it’s paid off), term life insurance can also be used however your loved ones need it most – to pay the mortgage and other debt, cover household expenses, and take care of other financial responsibilities they may have been left with.
Mortgage default insurance, on the other hand, is required by your lender if your down payment is under 20%. But it protects the lender’s investment in your home – not the people living under its roof.
Mortgage life insurance vs. term life insurance
Mortgage life insurance is a contract between you and your bank’s insurance provider. This kind of insurance kicks in when you die, letting your estate off the hook for the outstanding balance. In this case, money goes to your lender – not you or your family. And the insurance payout can only be used to cover the balance owing on your mortgage.
In this sense, mortgage insurance is a “single-use” policy because it can only be used to cover your mortgage debt. This also means that the value of your coverage is what’s called a declining benefit.
Term life insurance is also a contract between you and an insurance company, but it’s your loved ones – not the lender – who receive the payout in one, tax-free lump sum. They can use the money to help cover the mortgage, other expenses, or any way they wish. Term life insurance is more like a “multi-use” policy because your loved ones have the flexibility to choose how they use the money.
Let’s compare:
| Mortgage Life Insurance | Term Life Insurance | |
|---|---|---|
| Who owns the policy? | The bank / lender | You! |
| What about cost? | As your mortgage balance decreases, so does the amount of your coverage. | Your coverage stays the same no matter how much of your mortgage balance remains. |
| What if I want to refinance my mortgage? | This may terminate your coverage. | This will have no impact on your life insurance policy. |
| Is it flexible? | The payout is used for mortgage protection only. | The payout can be used to cover the mortgage – or for a different purpose entirely. |
| Is it convertible? | No. | Yes – regardless of your health, the policy can be converted from term to whole life without a medical evaluation*. |
| Who is the beneficiary? (In other words, who gets the payout?) | The bank/lender – the payout will be put towards paying off the mortgage. | The choice is yours – if you pass away during the term, the people you choose will get the payout. |
*All terms are convertible up to the policy anniversary nearest the insured’s 71st birthday.
When mortgage life insurance may make sense
Mortgage life insurance isn’t the right fit for everyone – but for some families, it makes sense. Below are three reasons you might consider it:
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Convenience. You can usually sign up right at the mortgage table, with no medical exam and just a handful of health questions.
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It’s mortgage-specific. Some people simply like knowing this policy exists for one purpose: the house. If you’re someone who prefers each financial box to have its own labelled lid – savings for savings, insurance for the mortgage – that structure can feel reassuring.
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Health concerns. A no-exam option can be a reasonable fallback if your health makes it challenging to get life insurance.
When term life insurance may be the better option
Many Canadian families prefer to feel like they have some ownership over their insurance policy – and a term life insurance policy certainly puts them in the driver’s seat. Below are three reasons you might find this option more suitable for your family:
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Cost vs. benefit. The younger and healthier you are, the more affordable a term life insurance policy will be. Not to mention, your loved ones will receive a full payout – the value doesn’t go down as the mortgage does.
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You’re in control. As the policyowner, you can decide how much coverage you need, who will receive the payout, and have the freedom to change lenders or move without worrying you’ll lose your coverage. Plus, you can choose a term length that aligns with your amortization period or the number of years until your children are independent.
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Flexibility. If you were to die during the term, your loved ones could choose how to use the payout – whether that’s paying the mortgage, covering living costs, or managing other priorities.
Is term life insurance better than mortgage life insurance?
A balanced way to think about it: mortgage life insurance offers speed and simplicity, term life insurance offers flexibility and value. Whether that trade makes sense depends on your family’s full picture. So before you sign, take a short pause and compare:
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Cost: Which is more affordable? And does the cost stay the same, or increase as you age or as the mortgage renews?
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Payout: Does the benefit go to your family or straight to the lender? Does the amount stay the same or shrink with your balance?
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Exclusions: What’s not covered, and how are health questions handled at claims time?
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Portability: What happens if you move, refinance, or switch lenders?
How long should your life insurance term be if you have a mortgage?
The most common term lengths in Canada are 10, 20, or 30 years, and it’s common to make a decision based on:
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mortgage amortization period
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the number of years until you’ve paid off major debt
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the number of years until children (or other dependents) are financially independent
Whatever you choose, remember to review your coverage with an advisor in the event of major life changes, such as:
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mortgage renewal or refinancing
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a move, or the purchase of a second property
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marriage, separation, or divorce
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birth/adoption of a child
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a major change in income
Next steps: Estimate your coverage need
Now it’s time to use the formula above to estimate what your needs might be, keeping in mind that for most Canadians the mortgage balance is only one piece of the puzzle. Need more help? Try Serenia Life’s term life insurance calculator – and be sure to book a meeting with a licensed advisor to get expert guidance before making any final decisions!
About Serenia Life Financial At Serenia Life, we believe a business can be kind. And we’re on a mission to prove it. For nearly a century, we’ve been helping Canadians plan for the future and protect their loved ones with customized life insurance and investment solutions. We support our members and their communities by offering a growing collection of unique member benefits, including $2,500 post-secondary scholarships, free digital wills, financial support for fundraisers and volunteer work, an award-winning loss support tool, and more. Visit Website >
Disclaimers
Each person’s coverage needs depend on personal financial circumstances. It is always best to speak with a licensed advisor for expert guidance.
1The investment component of a participating whole life policy is not guaranteed and is influenced by investment returns and other experiences, including mortality, expenses, taxes, lapses, and withdrawals. It may contribute to policy values above the guaranteed amounts and may be subject to taxation.
2Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
