Mortgage Insurance vs. Life Insurance

Mortgage Insurance vs Life Insurance. Before you sign your mortgage insurance, it's important to consider your life insurance policy. This article will look at both mortgage insurance and life insurance and why life insurance might be the better option.

Should I Buy Mortgage Insurance or Life Insurance?

Mortgage and life insurance aren’t mandatory, but when it comes to protecting one of your most valuable assets, insurance is a smart financial decision. On the surface, both coverage types pay off your mortgage should you die, so you can buy either one. However, you don't have to unpack much to see which is a far better product.

First, mortgage insurance is not CMHC insurance. CMHC insures high ratio borrowers against defaulting on their mortgage. If you put down less than 20% on your new home, you will need CMHC insurance.

With that out of the way, here's a quick breakdown of mortgage vs. life insurance.

Mortgage insurance is a product created by financial institutions. You pay a monthly premium, based on the amount you're borrowing, for the period you have your mortgage with the lender. Should you pass away, the bank will pay off the outstanding mortgage.

Life insurance is a product not associated with your house. You can buy life insurance online or from a broker for a term specified by you (5, 10, 20 years, or your whole life). Your premiums will vary based on your demographics, health, and how much money you'd like paid out after your passing. You can use it to pay off outstanding debts, credit cards, funeral expenses, and a mortgage. Therefore, things like overland water coverage would not be covered by life insurance and you would need to get that separately. If you want to learn more, feel free to check out this article on what is overland water coverage. 

Here are 5 reasons why you should buy life insurance and not mortgage insurance.

Declining returns

Mortgage insurance value decreases alongside your overall mortgage. Every time you make a mortgage payment, you owe less, and therefore your payout is also less. However, your monthly premiums stay the same regardless of the balance remaining on the mortgage. Your premiums are calculated on the amount you initially borrowed. On the other hand, life insurance premiums remain the same, as does the payout.

Flexibility

If you have a five-year mortgage, your mortgage insurance stops when the mortgage is paid, or if you choose to move to a new lender. With a five-year term life insurance policy, you can opt to renew, or extend your term life policy by adding more years. You could also convert it into a whole life insurance policy. 

Beneficiary

With mortgage insurance, the bank is the beneficiary and they decide what to do with the money. Life insurance, on the other hand, your named beneficiaries can do whatever they want with the payout. They decide whether to pay off the mortgage, provide income replacement, or pay for your kids to go to university.

Regulated sales

Whether your journey starts by shopping for life insurance quotes online or walking into a brokerage, the final deal is with a licensed professional who provides quality advice based on years of experience. Meanwhile, the staff in the bank, even specific mortgage representatives, are not required to have a license or specialized education to sell mortgage insurance.

Claims

With life insurance, the claim underwriting is done once the policy is signed. But, with mortgage insurance, the underwriting happens post-claim. That means once you die, they check if you qualify or not. For example, there's a section that asks if you've been to the doctor within the past six months. Let's say you forgot that you went to a walk-in clinic for antibiotics; well, they can deny your claim. Unfortunately, there are several examples of post-underwriting claims that have left already devastated families with financial burdens.

In closing

Don't protect the debt; protect yourself. Let your loved ones decide how to manage your settlement. Once your mortgage is paid, your mortgage insurance is gone potentially exposing your family to other money worries. Life insurance isn't mandated by law, but it's excellent protection, whether it's for your house or your loved ones. Check also this article about Manulife insurance and how they first in Canada started to provide life insurance to HIV positive persons.