Whether it’s your first mortgage or you’re renewing, there’s a lot of value in getting some form of life insurance. It’s vital to ensure your mortgage is paid for should you or your significant other pass away.
However, you’ve spent a lot of time looking for the right house or finding the best mortgage rate, so don’t rush the insurance decision. It could be a costly financial mistake.
Let’s look at two different ways to make sure your mortgage is paid after death and which of them is a smarter financial decision. We’re looking at mortgage insurance vs life insurance.
Motgage insurance vs life insurance:
In short, mortgage insurance is a type of life insurance purchased from your mortgage provider, which only covers your mortgage debt. Normal life insurance is broader coverage that can cover both your mortgage and other financial costs, and is sold by a life insurance company.
What is mortgage insurance?
A financial institution sells mortgage insurance to pay off your mortgage in case of death. A mortgage lender will walk you through the paperwork; it’s simple and easy. There are some medical history questions, but no medical exams, and, if approved, it’s tacked on to your monthly mortgage payments.
The premiums are determined by your demographics and the cost of your mortgage. If you pay the insurance premiums for the duration of your term, your mortgage should be covered should you die.
What is term life insurance?
Term life insurance is sold by a life insurance broker and covers you for a set period like 5, 20, or 30 years. The term is important. You want to specify a term that protects you against financial disasters where your dependents may be significantly affected.For example, making sure your kids have enough money before they go to college and still need financial support.
You can also specify how much the payout should be in case of a claim. There are medical questions, often medical testing, and a bevy of suppliers from which you can buy life insurance. So, make sure to shop for life insurance quotes to get the best rate, as they can vary. The monthly premiums are based on your demographics and overall health, the payout, and term length. You can use life insurance to pay off debts, your mortgage, or replace your salary.
A this point, mortgage insurance and life insurance might sound pretty similar. Let’s break it apart to get into the real differences.
As you can see in the table above, there’s a big difference when you compare mortgage insurance vs life insurance.
9 reasons to buy term life insurance over mortgage insurance
Thinking about life insurance?
When you purchase life insurance, you own the policy. If you buy mortgage life insurance, the mortgage lender holds the policy. In other words, the mortgage lender is the sole beneficiary with mortgage insurance, but with life insurance, you decide who will be the beneficiary.
Elaborating on the above statement, again it’s you who defines the beneficiary with life insurance. That means you can also change the beneficiary. For example, you could change the beneficiary to your kids in case there was a divorce. With mortgage insurance, only the lender can be the beneficiary.
3. Medical testing
With mortgage insurance, there’s usually no testing, just a few simple questions. However, this could be to your detriment. Despite answering to the best of your knowledge, you may have forgotten about that time a walk-in clinic doctor tested you for high blood pressure. If you failed to mention it, your claim could be denied. The problem with mortgage insurance is the underwriting happens after the claim is made, meaning they can look for all kinds of reasons to deny the claim. While there is medical testing with term life insurance, it’s only for your benefit, to protect you in the case of a claim. The life insurance broker has assured your coverage ahead of time thanks to the testing.
4. Policy renewal
If you signed up for a 20 or 30-year term life policy, you don’t have to do anything beyond continuing to pay for your monthly premiums. But, you’ll need to renew your mortgage insurance every time you renew your mortgage. The problem is that if you renew every 5 years, you’re also older, meaning you’re more of a risk and so you’ll pay more in premiums. With term life, your premiums remain the same for the length of the term. Insurance is typically cheaper the younger you buy it.
Life insurance is always portable. You can change mortgage lenders, but your life insurance stays with you. Life insurance doesn’t protect your home unless you want it to. Whereas mortgage protection is only about protecting your home, not anything beyond that.
The amount of coverage you’d receive declines with mortgage insurance. Depending on your mortgage payments, the balance of your mortgage is less, meaning your payout is less, despite paying the same premiums. With life insurance, the death benefit of the payout remains the same throughout your term.
Mortgage insurance covers your mortgage. You can use life insurance to cover whatever you want, such as funeral expenses, debts, income replacement, or your mortgage.
However, you choose to shop for life insurance, either online or through a brokerage, the final sale will be conducted by a certified life insurance broker. The staff in a financial institution are not required to have a license or pass any exams to sell mortgage insurance.
Mortgage insurance stops when the mortgage is paid, or if you choose to move to a lender that offers a better rate. With term life, you can extend your policy for a few more years or convert it into a whole life insurance policy.
The bottom line
Mortgage life insurance is convenient because it’s easy to apply when you’re getting a mortgage. The downsides, however, are many. Mortgage and life insurance aren’t mandatory. But, when it comes to protecting your most substantial financial investment, and your precious dependents from financial burdens, life insurance is the way to go.