Mortgage insurance vs. Life insurance: Which is for you?
February 1, 2016
Buying a home is one of the biggest investments any individual can make, and protecting your investment is just as important as making it—so its only natural to also purchase insurance plans. But which insurance option is the best for you when seeking to protect your home? While both ensure that your mortgage is paid should something happen to you or your partner, there are significant differences between the two. Here’s a closer look:
What is mortgage insurance?
Mortgage insurance could also be known as mortgage protection, because it’s offered from your bank to cover what you owe the lender on your mortgage should you pass away during the term of your mortgage.
What is life insurance?
Life insurance also protects you and your home, but whether you purchase it through a broker or any number of insurance providers, will pay a tax-free lump sum cash benefit to your beneficiaries upon your passing.
A closer look
The major difference between the two is that mortgage insurance is a declining benefit. The protection will only cover the balance of your mortgage. As you pay it down, the amount that’s being covered decreases—even though your payment stay the same. Upon your passing, only the outstanding balance is paid, and the lender (usually the bank) is the beneficiary.
With your life insurance, however, the coverage will remain the same over time, and the benefit paid out upon your passing can go to whatever your beneficiaries choose. Life insurance also gives you more of a choice as to what length of time you’ll be covered.
Here are even more differences in mortgage insurance vs. life insurance:
Mortgage insurance: Your insurance covers only your mortgage balance.
Life Insurance: You can choose from different types of insurance (i.e. term or permanent) with a death benefit to cover more than just your mortgage.
Mortgage insurance: Even though your mortgage debt reduces over time, your premiums remain level
Life insurance: Your coverage amount doesn’t decrease over time unless you choose to change it.
Mortgage insurance: If you take your mortgage to another company, you may lose your existing mortgage insurance and may be required to re-qualify for new mortgage insurance.
Life insurance: If you take your mortgage to another company you keep your existing insurance, so you don't have to re-qualify.
Mortgage Insurance: Coverage is lost when your mortgage is repaid, assumed or in default.
Life Insurance: As long as premiums are paid and your coverage remains in place, even if your mortgage is repaid, assumed or in default.
Mortgage insurance: You have no flexibility to change your coverage as your needs change.
Life insurance: If you decided you need coverage only until your mortgage is repaid but later realize you require coverage for other needs, you can convert your insurance to a permanent plan.
There are plenty of factors to consider when insuring your home. Both mortgage insurance and life insurance essentially serve the same purpose, but as outlined above, there are some important differences, so it’s imperative that you do your research and consider the whole picture – including living costs and insurance needs – before selecting a policy.