Get ready to clear up the confusion between mortgage insurance and life insurance! These two financial products are often mixed up, but they serve very different purposes.
Mortgage insurance protects lenders from the risk of borrowers not paying their mortgage, while life insurance provides financial support to loved ones in case of the policyholder’s passing.
So, which one do you need? In this article, we’ll give you a detailed comparison of mortgage insurance vs. life insurance, so you can make an informed decision about what’s right for you.
What is Mortgage Insurance?
Mortgage insurance is an insurance policy offered by banks and financial institutions that covers your mortgage payment in case of unexpected events, such as disability, illness, or death.
This type of insurance, also known as mortgage life insurance or mortgage protection insurance, requires a fixed premium payment to cover the reduced mortgage debt until the balance is paid off. The cost is added to your monthly mortgage payment, making it easier to manage.
The greatest benefit of mortgage insurance is that your family won’t have to worry about paying off the mortgage debt or losing your home if something happens to you.
Additionally, mortgage insurance is generally easier to qualify for than traditional life insurance policies, making it a good option for those who may have difficulty getting approved for other types of coverage.
Now that you know what mortgage insurance is, you can decide if it’s the right choice for your financial situation.
What is Life Insurance?
Life insurance is a type of insurance policy provided by insurance companies across Canada that pays a death benefit to your chosen beneficiary in the event of your passing while you’re covered under the policy.
Unlike mortgage insurance, which is owned by the lender, you own your life insurance policy, and your beneficiaries can use the payout as they see fit.
Another benefit of life insurance is that it’s not tied to your mortgage’s duration and won’t expire once your mortgage is paid off. Plus, you can transfer your policy if you decide to change mortgage providers.
Unlike mortgage insurance, the coverage amount of your life insurance policy remains the same and can be adjusted to meet your needs as your life circumstances change.
6 Reasons Why Life Insurance Is Better Than Mortgage Insurance
There are a few differences between mortgage insurance and life insurance. Indeed, there are some advantages to mortgage insurance, but you can’t compare them to the benefits of life insurance.
Let’s look at some advantages of life insurance over mortgage insurance.
1. Life Insurance Offers Flexibility
If something happens to you, your spouse and children will face many troubles. Paying off the mortgage may not be at the top of this list.
With mortgage insurance, your family would have no choice in how the policy proceeds are spent. Life insurance gives your beneficiaries the flexibility to make the best use of your death benefit. They can use the money for college education or pay off other pressing debts.
People are not static, and their needs can change as the years go by. Life insurance gives your family conversion options for more flexibility, unlike singular static policies like mortgage insurance.
2. Life Insurance Lets You Choose Your Beneficiary
Mortgage insurance isn’t designed to protect your family. Instead, it is designed to ensure that your lender receives their money. Your family benefitting from your mortgage insurance policy is only a secondary purpose.
Your lender is the automatic beneficiary of your mortgage insurance. You insure your lender’s risk when buying a mortgage insurance policy.
However, life insurance pays out your death benefit to the beneficiary of your choice. It serves as financial security to protect them when you are no longer around.
If your spouse is the beneficiary of your life insurance policy, they can use the proceeds of your policy to maintain the quality of living after you die. This may also include mortgage payments but doesn’t stop there.
3. Life Insurance Offers A Consistent Payout
With mortgage insurance, your coverage amount declines as you pay down your mortgage debt. The benefit you would receive declines with every mortgage payment you make.
Over time, your payout will reduce to a minimal amount, but you will still pay the same premiums. And when you pay off your mortgage payments, your mortgage insurance ends.
However, with life insurance, this is not the case. Your coverage amount remains the same throughout the length of your policy.
4. Life Insurance Is Portable
Suppose you want to sell your current home and buy a new one, refinance your home, or renew your mortgage with your existing lender. In that case, you would need to buy new mortgage insurance policies.
Mortgage insurance does not move or port along with your mortgage. Only life insurance can do this.
Mortgage insurance doesn’t go with you if you change mortgage providers. You must prove your health is good enough anytime you move your mortgage to another bank.
Life insurance stays with you throughout your life’s changes. It stays with you even if you decide to move your mortgage to another company. You don’t need to re-apply to get insured. You don’t have to undergo another medical exam to prove your health is good enough to insure.
5. Life Insurance Offers Lower Premiums
Applying for mortgage insurance is usually simpler than applying for life insurance. However, this simplicity ends up increasing the cost of insurance.
Premiums for mortgage insurance offered by banks are higher than term life insurance premiums. The premiums usually increase with age.
With life insurance, the insurance company puts in much work to ascertain the insured’s risk and can give a more accurate and lower premium. Mortgage insurance doesn’t do much underwriting during the insurance process, and you have to pay for the assumed risk.
6. Life Insurance Offers Guaranteed Coverage
Life insurance companies guarantee your coverage throughout the length of your insurance policy. Regardless of any changes in your health or lifestyle, your coverage is guaranteed once your policy is approved.
However, mortgage insurance does not guarantee the term of your loan. Any adverse changes in your health can cause your lender to deny your coverage. Your lender can decline your coverage if they discover that your health isn’t in line with their expectations.
Mortgage Insurance Vs Life Insurance: Which is More Affordable?
Bank-offered mortgage insurance usually does not have an underwriting process when you purchase a policy. You instantly qualify for a policy without a medical exam. This leads to higher premiums for mortgage insurance policies because you have to pay for the assumed risks.
However, buying term life insurance policies in Canada gets you more affordable premiums. Though the underwriting process may be exhausting, the lower premiums are worth it. The insurance company puts in lots of work to determine your risk level and charge a more accurate and lower premium.
For example, in Canada, PolicyMe offers an average term life insurance of $500,000 coverage amount for a 35-year-old non-smoking male over a 20-year term for only $31.42 per month.
However, a person of the same age who opts for mortgage insurance for the same amount will likely pay about $50 for monthly premiums.
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Do I Need Mortgage Insurance If I Have Life Insurance?
No. If you already have a life insurance policy and your policy is adequate enough to cover the outstanding balance of your mortgage in the event of your death, then mortgage insurance is not necessary.
However, if your life insurance policy is not enough to pay off your mortgage in the event of your death or if you do not have life insurance, then mortgage insurance may be a viable option.
It is more advisable to get a life insurance policy if you don’t have one. Mortgage insurance only covers the outstanding mortgage balance and protects the lender in the event of the borrower’s death.
But with life insurance, you can provide financial support for your loved ones in the event of your death and can be used for various expenses.
Ultimately, you should consult with a financial advisor to determine the best solution for your financial situation.
Is Mortgage Insurance Worth It?
Yes and No.
If you do not have enough life insurance coverage to pay off your mortgage in the event of your death, then mortgage insurance may be worth it to ensure your loved ones are not burdened with paying the mortgage.
However, if you have enough life insurance coverage to cover your mortgage in the event of your death, then mortgage insurance may not be necessary.
Whether or not mortgage insurance is worth it depends on your specific financial situation and needs. Ultimately, the decision is yours to make. But it is important to note that life insurance is better than mortgage insurance.
Final Thoughts on Mortgage Insurance Vs Life Insurance
When it comes to mortgage insurance vs life insurance, picking the right policy can be easy.
There is a lot of information on why life insurance may be better than mortgage insurance, but ultimately, the decision is yours to make.
You can speak to an experienced insurance advisor to discuss your family, financial and personal goals and see which products fit you.
Don’t hesitate to reach out should you have any questions.
