Buying a home? In all likelihood this is the largest expenditure that you will ever have. And, you’ve justifiably decided to purchase protection on it. The next step is to choose which kind of protection to invest in. However, you may not be sure which type of insurance avenue is appropriate for you. Two of the most common ways would be either with life insurance or mortgage insurance.
When you’re about to become a new homeowner, your mortgage lender will likely offer you mortgage insurance also known as mortgage protection insurance. The purpose of this type of insurance is to protect your loved ones from being left with the burden of a large mortgage if you were to pass away unexpectedly. The sum will pay off the mortgage balance up to the maximum specified by the policy.
On the other hand, life insurance is purchased from an insurance provider and provides financial support to your loved ones in the event of your unexpected death. It covers any expenses you leave behind including a mortgage and, the beneficiaries receive the full amount of the insurance and not just the balance of the mortgage at time of death. A term policy can cover the number of years that you know you will need to pay off the mortgage (or frankly any major expenses) and it often comes in 10, 20, 25, and 30-year terms. This type of life insurance comes in permanent and term options and can be purchased at any point of time in your life.
Although mortgage insurance can be a good option for those who have difficulties qualifying for life insurance, the fact is that life insurance has more benefits.
The Benefits of Life insurance
The benefits of life insurance in comparison to mortgage insurance are evident:
Life insurance allows you to choose the beneficiary/ies of your policy which means you have full control over who will receive the death benefit when you pass away. Your beneficiaries own the policy and not the bank or financial institution. An added benefit is that there are no limitations on what the beneficiary can spend the money on, they can essentially spend it on whatever expenses need to be looked after. For example, they can use the money to pay for school tuition, living expenses, your funeral expenses, and more.
With life insurance, you can select term life insurance, and the term duration is in your control. You can choose 10 years, 20 years, 25 years, or whatever term is outlined in your policy. This offers you the freedom to decide how long this protection may be needed for.
Unlike mortgage insurance, as long as the terms and conditions of the life insurance policy are followed then it will pay out in full when you pass away. This is regardless of if your mortgage still has an outstanding balance, because your life insurance isn’t linked to your mortgage. You won’t need to worry about your beneficiaries receiving less and you will have peace of mind that they can use the full amount.
Some insurance providers underwrite the policies at the time of the application. This means that depending on your health and situation, you may pay a lower premium compared to other insurance options which may involve underwriting the policies at the time of the claim.
Disadvantages of Mortgage Insurance
You should be aware of the following disadvantages of mortgage insurance in comparison to life insurance:
Mortgage insurance is given to you by your lender, so when you pass away your lender is the one that benefits instead of a beneficiary that you have chosen yourself. If you haven’t paid off your mortgage when you pass away, the death benefit only covers your mortgage or a portion of your mortgage. As a result, no other expenses or additional outstanding debts can be covered.
Mortgage insurance may not provide a lot of flexibility to let life happen compared to life insurance. Since your insurance is tied to your mortgage, if you decide to move houses, then you’ll need to requalify for mortgage insurance. Also, if you want to change financial institutions to take advantage of a lower mortgage interest rate, you will need to apply for a new mortgage insurance policy.
Since your mortgage and insurance are linked, as you pay down your mortgage the payout decreases in value. This means that if you pay off your mortgage entirely before you pass away, your beneficiaries won’t receive a death benefit from your mortgage insurance policy. It’s meant to help your beneficiaries pay off the outstanding debt on your mortgage, but if this debt doesn’t exist anymore then the benefit isn’t relevant. Yet, with life insurance the value of your policy doesn’t decrease even if your mortgage is paid down or paid off.
When is Mortgage Insurance Appropriate?
While, mortgage insurance can seem convenient because it’s offered when you get your mortgage, that doesn’t mean it’s necessarily the right choice for you. Mortgage insurance can be beneficial if you want to cover this very specific debt should you pass away.
Yet, it’s important to note that the death benefit from a life insurance policy can also be used to cover outstanding mortgage debt (just ensure that you buy a policy with large enough coverage). So, you’ll have the peace of mind that all of your expenses will be covered, and not just one specific debt.
People often believe that mortgage insurance may be easier to qualify for than life insurance especially if you are in poor health or may have been declined coverage in the past. This isn’t true. Many people can qualify for no-medical life insurance from an insurance provider. This option means you won’t need to participate in a medical exam or test (drawing fluids and/or needles aren’t necessary) to qualify.
Can you purchase both types of insurance?
It is possible to purchase both mortgage insurance and life insurance. The death benefit from the mortgage insurance can pay for the outstanding mortgage debt. While the death benefit from life insurance can provide financial security for your loved ones should you pass away.
Is life insurance right for you?
When deciding between mortgage insurance or life insurance, there are important considerations to make. It is evident that life insurance is beneficial in many ways whereas mortgage insurance is specifically designed to cover a very specific expense. It’s best to fully understand your insurance options before making a final decision.