Gabriel Lalonde
November 9, 2020

Term Life Insurance vs. Mortgage Insurance – Which do you need?

Your home is likely your greatest financial asset (other than your business) and it’s also likely your biggest debt – so why not protect it with life insurance? Ensuring your assets are protected in case of an unfortunate event is always a smart financial strategy because it eliminates financial worries for your surviving loved ones.

When it comes to choosing an insurance policy to protect and provide for your family, homeowners have two options: mortgage insurance and term life insurance. One is convenient and one is flexible, less expensive and permanent.

What is mortgage insurance?

Mortgage insurance is offered through your bank, lender or mortgage broker and is attached directly to your mortgage loan. This may be an attractive option for first-time homebuyers because it’s very easy to apply for since it’s attached to your mortgage. However, with convenience comes a cost. Mortgage life insurance is generally more expensive than term life insurance.

Mortgage insurance is only intended to pay off your outstanding mortgage balance upon death. The beneficiary is automatically the lender and the amount of your coverage decreases over the years as your mortgage is paid off. Mortgage insurance is renewed with every mortgage term i.e. 5 years. This means the cost for coverage often goes up as you get older, but the coverage goes down as your mortgage balance is paid off. You’re definitely not getting what you pay for, you’re only paying for convenience.

Another downside is claims for mortgage insurance can often be denied since they’re underwritten at the time of the claim, not when you apply for the insurance coverage. For this reason, we have a lot of bank financial advisors who apply for personal term life insurance with us, because the coverage offered with their bank is often expensive and insufficient.

This type of life insurance takes away the financial burden of your mortgage debt from your loved ones – but that’s all it does. Families have other monthly and lifestyle expenses – above and beyond your mortgage. How will you ensure those costs are covered for your family after you’re gone?

What is term life insurance?

An alternative – and most likely better – option is to purchase term life insurance. Term life insurance is purchased for a specific dollar amount for a set number of years i.e. $300,000 for 25 years. The cost of term insurance tends to be lower than mortgage insurance and coverage is constant, guaranteed and permanent – it won’t change over time. If you like financial certainty and the cost fits into your budget, this is likely a better life insurance option for you and your family.

A term life insurance policy isn’t attached to your mortgage. Therefore, you have the flexibility to name any beneficiary you want and the money can be used for any purpose. It’s flexible, predictable and can help provide a financial future for your family.

With term life insurance, you get what you pay for. The cost is usually cheaper than mortgage insurance, your premiums won’t change over the years and your coverage amount won’t decrease. It’s a win-win-win for your financial plan. You also completely control who receives the money and how it’s used. There are no surprises with term life insurance.

Benefit Mortgage Insurance Term Life Insurance
Amount of coverage Only your outstanding mortgage balance and declines as the balance is paid down A fixed amount and does not change over the years
Price Tends to be higher If in good health, it’s usually less expensive
Designated beneficiary Can only be used to pay off the mortgage balance You can name any and as many beneficiaries as you like
Flexibility for intended purpose Used to pay off the mortgage debt Can be used for any purpose
Policy renewal Must be renewed with every mortgage term No renewal after purchase for initial number of years i.e. 20 or 30
Underwriting Underwritten at the end i.e. the time of the claim Underwritten at the beginning i.e. the time of application

Who needs life insurance?

The short answer is everyone, but the type and amount vary depending on your needs and the intended purpose. If you’re a business owner, you may need life insurance to protect your company and your partners. If you’re the main income provider in your household, you may need term life insurance to cover the cost of living expenses for your family.

The truth is, everyone needs some type of life insurance because we will all have final expenses that come when we pass away such as taxes, outstanding debts and funeral/burial expenses. Contact us to discuss your financial goals and we can help determine which type of life insurance is best for you.

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