Do you need mortgage insurance to protect your home, or would life insurance be more beneficial? Understanding the differences between mortgage insurance and life insurance can help you determine which option better protects your home and family. Your home is likely your biggest asset, so it’s essential to know how to safeguard it in case something happens to you.
As a homeowner, you have two primary options:
- Protect your mortgage with a life insurance policy from an insurance company
- Purchase mortgage insurance from a bank or mortgage lender
| Mortgage protection insurance through the lender | Life insurance through a life insurance company or financial advisor | |
|---|---|---|
| Homeowner | Protects mortgage lender against debt | Protects homeowner’s mortgage debt |
| Beneficiary | Payout for mortgage lender | Payout for beneficiary |
| Evaluating medical evidence of your risk as the life-insured | Minimal questions | More questions, and for high coverage amounts ($500,00-$1million+) and older homeowners you may be asked to take health tests |
| Decision on assuming the risk and paying the claim | Underwritten at time of claim, so you may find out coverage isn’t available | Underwritten at time of application, so decision to provide coverage is made at outset |
| Amount of coverage | Drops as mortgage drops | Can stay the same or be reduced, at the policy owner’s discretion |
| Portability | Coverage applies to the same home under the same terms with the same lender | Coverage can be moved to cover any home and regardless of changes to mortgage lender or terms of repayment |
| Renewal of coverage | Need to renew coverage with each renewal period and change of lender. May need to prove reasonable, good health. Cost of coverage per dollar increases in accordance with rates at that time | Premiums remain the same for the length of the term. Renewal rates are guaranteed at the outset, and no further evidence of insurability is required if you keep the same policy |
| Use of coverage | Pays back the lender for the outstanding mortgage | Payouts for any purpose, including mortgage |
| Terms | Ends either when mortgage is paid off or when you switch lenders—whichever occurs first | Ends when you reach a certain age with term life insurance or the policy owners full lifetime with whole life insurance (term can be converted to whole coverage if desired) |
| Cost | 2.8% to 4.0% of their mortgage amount | Significantly less than mortgage insurance. Approx. $500 a year, depending on the policy |
How Mortgage Insurance and Life Insurance Work
Life Insurance:
- Death Benefit: Provides a tax-free payout to beneficiaries, which can be used for any purpose, including paying off the mortgage
- Term Life Insurance: Covers a set period with low premiums initially
- Whole Life Insurance: Provides lifelong coverage, with the option to convert term policies
Mortgage Life Insurance:
- Coverage: Pays off or reduces the mortgage balance in the event of the borrower’s death
- Convenience: Often easier to qualify for and involves a simple application process
- Limitations: Only covers the mortgage balance and the payout goes directly to the lender
Key Differences:
- Beneficiary: Life insurance allows you to choose your beneficiary, whereas mortgage insurance benefits the lender
- Medical Exams: Mortgage insurance generally requires fewer initial medical questions but may deny claims based on later findings. Life insurance involves thorough underwriting at the time of application
- Portability: Life insurance is portable and stays with you, while mortgage insurance is tied to the home and lender
- Coverage Flexibility: Life insurance provides stable coverage that can be adjusted, while mortgage insurance decreases with the mortgage balance.
- Flexibility in Use: Life insurance payouts can be used for various expenses, not just the mortgage
- Expertise: Life insurance is typically sold by licensed advisors, while mortgage insurance is sold by bank staff
- Longevity: Mortgage insurance ends with the mortgage, while life insurance can extend beyond or be converted to other policies
Making the Right Choice
Choosing between life insurance and mortgage insurance depends on your personal and financial situation. Life insurance offers more flexibility, stability, and potential cost savings. Mortgage insurance may be more convenient for new homeowners looking for immediate and straightforward coverage. Knowing the pros and cons of each can help you protect your home and family effectively.
