For most people, your home is your biggest investment. So it makes sense to protect it with some form of insurance that will pay the mortgage if you or your partner were to pass away. You have two choices: mortgage insurance and term life insurance. Both will do the trick, but in two very different ways. Here’s how.
Mortgage insurance: what is it?
Mortgage insurance is sold by financial institutions to pay off your mortgage in the event of death. It can only be used to pay off your mortgage. The cost is usually added onto your monthly mortgage payments, which is convenient.
Term life insurance: what is it?
Term life insurance, on the other hand, is sold by insurance companies to provide a lump-sum benefit to your beneficiaries (usually your family, but it’s up to you) in the event of your death. That money can be used any way they want: to pay off the mortgage, cover debts, pay living expenses and replace lost salary. It’s sold in set lengths of time called terms, for example, 5-, 10- or 20-year terms.
Which costs less?
Over the course of a 20-year mortgage, the cost of mortgage insurance vs. term life insurance can be very different. Specifically, you have access to the best rates on term life insurance if you apply when you are younger and in good health. This makes term life insurance an attractive choice for financial reasons.
7 key differences between mortgage insurance and life insurance
Knowing the differences between term life and mortgage insurance can help you make the right choice for your mortgage and loved ones.
1. The beneficiary
With term life insurance, you decide who the beneficiary is. But with mortgage insurance, the mortgage lender is the sole beneficiary if you were to pass away. Your lender, and not your loved ones, receives the payout. However, your loved ones do benefit because the mortgage is paid off.
2. Medical tests
On the upside, with mortgage insurance there’s usually no medical exam required. On the downside, if you have health issues it can result in your claim being denied later, because underwriting happens after the claim is made. Term life insurance usually requires a medical questionnaire and exam because the underwriting happens before a claim is made. Because of the medical tests you take and questions you answer, you can be more confident that the insurance provider will pay the claim.
Term life insurance is portable. It remains in place, whether you move, pay off your mortgage or change your mortgage lender. Mortgage insurance is tied to your home and mortgage and can only be used for that. If you sell your home, pay off your mortgage or change lenders, your coverage ends.
With term life insurance, your benefit remains the same and never changes. Mortgage insurance coverage decreases over time as your mortgage amount gets smaller. That means the payout with mortgage insurance would be less after several years than it was when you first purchased it even though you’re still paying the same premiums.
It’s hard to beat the flexibility of term life insurance plans. Your family or beneficiaries can use the payout any way they want, for things like funeral expenses, to help pay the cost of a child’s education or to help your surviving spouse live more comfortably after you’re gone. Mortgage insurance can only be used to pay off your remaining mortgage, nothing else.
When you purchase term life insurance, you may deal with a licensed insurance advisor who is trained and certified. You can also apply online. When you purchase mortgage insurance, it’s through a financial institution, where the staff may not have taken any exams or obtained a license to sell mortgage insurance.
Mortgage insurance ends when your mortgage is paid off or you move to a different lender, whereas term life insurance can often be extended or converted to another policy when your term is up.
The appeal of mortgage insurance for many is the convenience, plus no medical exams. But the drawbacks are lack of flexibility and no choice of beneficiary, among other things. Whether you choose term life insurance or mortgage insurance to protect your home and your family, knowing the pros and cons of each can help you make the right choice. The right choice for you may be Engineers Canada-sponsored Term Life Insurance, which is available at very affordable rates.