Bank Mortgage Insurance vs. Term Life Insurance: Why You Should Say 'NO' to Your Lender in 2026
 |
| Why You Should Say 'NO' to Your Lender in 2026 |
You have finally found your dream home in Toronto or Vancouver. You sit down at the bank to sign the endless pile of mortgage documents. The mortgage specialist, smiling warmly, pushes one final paper across the desk.
"This is Mortgage Life Insurance," they say. "It protects your family. If something happens to you, the mortgage is paid off. It's just a few dollars added to your monthly payment. Shall we sign you up?"
It sounds responsible. It sounds convenient. But financial experts across Canada agree: Bank Mortgage Insurance (Creditor Insurance) is often a terrible deal.
Before you check that "Yes" box, you need to understand the massive difference between the insurance the bank sells and a personal Term Life Insurance policy. (And no, this is NOT the mandatory CMHC insurance!)
⚠️ Confusion Alert: "Optional" vs. "Mandatory"
First, let's clear up the biggest myth. In Canada, there are two types of "Mortgage Insurance":
- CMHC Default Insurance (Mandatory): If your down payment is less than 20%, you MUST buy this. It protects the bank if you stop paying. You have no choice.
- Bank Mortgage Life Insurance (Optional): This pays off the mortgage if you die. This is completely optional. Under Canadian law (Section 459.1 of the Bank Act), a bank cannot force you to buy this as a condition of getting your mortgage. This is called "Coercive Tied Selling," and it is illegal.
1. Who Gets the Money? (The Beneficiary Trap)
The most critical difference lies in who receives the payout.
🏦 Bank Mortgage Insurance
The Beneficiary is the BANK.
If you die, the insurance company sends the cheque directly to the bank to pay off the mortgage balance. Your family never sees a penny. They get a mortgage-free house, which is nice, but they might have needed cash for funeral costs, property taxes, or daily living expenses.
👤 Term Life Insurance
The Beneficiary is YOUR FAMILY.
If you die, your spouse receives the full tax-free lump sum (e.g., $800,000). They can choose to pay off the mortgage, or they can invest the money and keep paying the monthly payments. They have control, not the bank.
2. Declining Coverage vs. Level Coverage
This is where the bank's product feels like a rip-off, especially with 2026 home prices averaging over $1M in major cities.
Bank Insurance: Paying More for Less
With bank mortgage insurance, your premium stays the same, but your coverage declines as you pay down your mortgage.
- Year 1: You owe $800k. Coverage is $800k. Premium is $60/month.
- Year 10: You owe $500k. Coverage is only $500k. Premium is STILL $60/month.
- Year 20: You owe $100k. Coverage is $100k. Premium is STILL $60/month.
Term Life: Locked-In Value
With a personal Term Life policy (e.g., Term 20), your coverage stays level.
- If you buy an $800,000 policy, it pays out $800,000 whether you die in Year 1 or Year 19.
- Even if your mortgage is nearly paid off, your family still gets the full $800,000 to fund their retirement or your kids' education.
3. Portability (The "Switching" Headache)
Canadians move or switch lenders often to chase lower rates (especially at renewal). In 2026, loyalty to one bank is rare.
- Bank Insurance is NOT Portable: If you switch your mortgage from TD to RBC, your TD insurance is cancelled. You have to re-apply with RBC. If your health has changed (e.g., you developed diabetes or high blood pressure), RBC might deny you or charge you triple.
- Term Life IS Portable: Your personal policy follows YOU. It doesn't matter which bank holds your mortgage or if you move to a different province. You own the policy, not the lender.
4. The "Post-Claim Underwriting" Nightmare
This is the scariest part exposed by investigations like CBC Marketplace. Bank mortgage insurance involves very few health questions upfront. It seems easy to qualify.
However, they use "Post-Claim Underwriting." This means they typically don't verify your medical history until AFTER you die.
When your family files a claim, the insurer investigates your doctor's records. If they find any discrepancy or pre-existing condition you "forgot" or misunderstood on that simple form 10 years ago, they can deny the claim.
With Term Life, underwriting happens upfront (with a nurse visit or detailed interview). Once you are approved, you have certainty that the policy will pay out.
Convenience Comes at a Cost
The only advantage of bank mortgage insurance is convenience. You can sign up in 5 minutes.
But for that convenience, you get a product that is often more expensive, offers declining value, and gives zero control to your family.
Do this instead: Tell the bank "No thanks" (remember, they can't force you). Then, call an independent insurance broker and buy a Term 20 Life Insurance policy. It will likely cost you 30-50% less and provide protection that you—not the bank—actually own.
0 Comments