Mortgage Insurance: Lender vs Individual | Comparison Guide

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In Canada, mortgage lenders routinely offer life, disability, and critical illness insurance tied to the mortgage loan. This coverage, typically presented at mortgage signing, protects the loan balance if the borrower dies, becomes disabled, or is diagnosed with a critical illness. However, lender mortgage insurance and individual life insurance purchased from an independent insurer have fundamental differences that every Quebec borrower should understand before committing. Lender insurance is a group policy where the beneficiary is the financial institution itself. Coverage decreases as the mortgage balance is repaid, while premiums generally remain constant. The coverage is not portable: if the borrower switches lenders at renewal, they must apply for a new policy and complete a new medical questionnaire, possibly at an older age and with a different health status. Individual life insurance, by contrast, belongs to the insured, offers a fixed benefit amount, is fully portable between lenders, and allows the designated beneficiary (spouse, children) to receive the payout directly. The Insurance Bureau of Canada and the Autorité des marchés financiers (AMF) recommend that consumers carefully compare both options. A mortgage broker in Quebec has a professional duty to inform clients of these distinctions so they can make an informed choice.

Lender Mortgage Insurance: How It Works and Its Limits

When you sign your mortgage, your financial institution almost invariably offers life, disability, and critical illness insurance tied to your loan. This insurance, also called creditor insurance or lender mortgage insurance, is a group insurance policy issued by an insurer partnered with the bank. The underwriting process is simplified: you answer a few health questions, and coverage takes effect quickly.

The beneficiary of this policy is the financial institution itself, not your loved ones. In the event of death, the benefit is paid directly to the lender to repay the remaining mortgage balance. Coverage decreases as you repay your loan, while your premiums generally remain at the same level throughout the term. This structure means the actual cost of your insurance per dollar of coverage increases progressively.

Individual Life Insurance: An Often More Advantageous Solution

Individual life insurance is purchased directly from an independent insurer through a financial security advisor certified by the Autorité des marchés financiers (AMF). Unlike lender insurance, you are the policy owner and freely designate your beneficiary. The coverage amount is fixed for the entire contract duration (10-year term, 20-year term, or permanent), ensuring your loved ones will receive the full amount regardless of your mortgage balance at the time of death.

Full portability: your insurance follows you if you switch lenders at renewal
Beneficiary of your choice: the benefit is paid to the person you designate, not the bank
Fixed coverage: the insurance amount does not decrease as the loan is repaid
Complete medical underwriting upfront: once approved, your coverage is guaranteed
Flexibility: the policy can cover other needs beyond the mortgage (emergency fund, children's education)

Cost Comparison and Long-Term Value

For a healthy 35-year-old borrower with a $400,000 mortgage, lender insurance premiums typically range from $80 to $120 per month for combined life and disability coverage. An individual 20-year term policy for a fixed $400,000 may cost between $30 and $60 per month depending on health profile. Over the duration of a 25-year mortgage, the difference can represent thousands of dollars in savings, while providing superior coverage since it does not decrease.

Mortgage Broker Obligations in Quebec

Under the Act respecting the distribution of financial products and services (CQLR, c. D-9.2) and AMF guidelines, mortgage brokers in Quebec must inform clients of both insurance types and their fundamental differences. This disclosure obligation is part of the broker's duty to advise. Although mortgage brokers cannot sell individual life insurance (this activity is reserved for financial security advisors), they must mention the option and recommend the client consult a qualified professional before making a decision. Failing to do so could constitute a professional conduct violation.

Frequently Asked Questions

What is the main difference between lender mortgage insurance and individual life insurance?

Lender insurance is a group policy where the beneficiary is the financial institution, with coverage that decreases as the mortgage balance is repaid. Individual insurance belongs to the insured, offers a fixed benefit amount, and the designated beneficiary (spouse, children) receives the payout directly, allowing them to choose how to use the funds.

Is lender mortgage insurance transferable if I switch banks?

No. Lender insurance is not portable. If you switch financial institutions at renewal, it is necessary to apply for new insurance and complete a new health questionnaire. Since your health may have changed since your original application, you may face higher premiums or be denied coverage.

Is individual insurance more expensive than lender insurance?

Not necessarily. For a young, healthy borrower, individual insurance is often less expensive long-term because premiums are set based on actual risk and coverage does not decrease. Lender insurance may appear advantageous short-term because it typically requires only a simplified questionnaire.

Can my mortgage broker advise me on insurance?

In Quebec, mortgage brokers have a professional duty to inform clients about both types of insurance and their differences. However, for in-depth advice on individual life insurance, it is recommended to consult a financial security advisor certified by the AMF.

What happens if my lender insurance claim is denied?

Lender insurance performs medical underwriting at the time of claim rather than at the time of application. This means undisclosed health issues in the initial questionnaire could result in a claim denial, even after years of paid premiums. Individual insurance completes full underwriting upfront, providing greater coverage certainty.