When securing your family’s financial future, particularly your home mortgage, understanding the difference between mortgage and life insurance is crucial. Both offer protection, but in very different ways. Let’s explore the details to assist you in making a well-informed choice.
What is Mortgage Insurance?
At the end of 2022, around 35.5% of Canadians had a mortgage, with a significant portion experiencing financial difficulties. One out of every three mortgage holders struggled to fulfill their financial obligations. To ensure your family doesn’t have to struggle with paying off the mortgage in case of your passing, consider investing in insurance.
Mortgage insurance is intended to pay off your mortgage if you pass away. It ensures that the outstanding mortgage amount is paid off if something happens to you, allowing your family to retain home ownership without the burden of monthly mortgage payments. It’s often more accessible and easier to obtain than personal life insurance, especially when arranged alongside a mortgage at the bank.
Targeted mainly at new homeowners, mortgage life insurance addresses concerns about leaving behind a large mortgage due to unforeseen circumstances. It complements your financial plan by allowing other insurance payouts, like those from employer benefits or personal policies, to be used for expenses beyond the mortgage.
This insurance typically includes a 30-day review period; premiums are refundable if you cancel coverage. This period provides an opportunity to assess the policy and consult with an advisor to tailor insurance choices to your financial needs.
What is Life Insurance?
Life insurance, on the other hand, is a broader financial safety net. Upon your passing, it pays a death benefit to your beneficiaries, either revocable or irrevocable. It can be used for any purpose, including paying off the mortgage, covering living expenses, or funding your children’s education. In 2022, Canada’s health and life insurers covered over 29 million – or 74% of Canadians, which was $114 billion in total claims.
There are primarily two kinds of personal life insurance: term and permanent.
Permanent life insurance provides lifelong, guaranteed coverage. It’s more than just a safety net; it accumulates value over time, which can be accessed as cash during your lifetime.
Term life insurance offers temporary protection, ensuring a tax-free sum to your designated beneficiaries if you pass away within a specified term. The premiums are fixed for the chosen term and remain constant.
Mortgage Insurance vs Life Insurance: A Comparative Analysis
1. Protection
- Mortgage Insurance: Protects the mortgage lender against debt.
- Life Insurance: Covers the homeowner’s mortgage debt.
2. Payout
- Mortgage Insurance: The payout goes to the mortgage lender.
- Life Insurance: You decide who receives the death benefit, so the payout goes to the chosen beneficiary.
3. Coverage Specificity:
- Mortgage Insurance: Solely covers your mortgage.
- Life Insurance: Provides a lump sum that beneficiaries can use for various needs, not just the mortgage.
4. Premium Cost and Cost Over Time:
- Mortgage Insurance: It’s double the amount you’d pay for term life insurance, 2.8% to 4.0% of the mortgage amount. Plus, premiums may not decrease despite the reduced loan amount.
- Life Insurance: It’s usually less expensive, approximately $500 a year. It offers more value for money as the coverage amount remains constant.
5. Flexibility and Control:
- Mortgage Insurance: Limited control as the lender is the beneficiary.
- Life Insurance: Beneficiaries have complete control over how to use the death benefit.
6. Underwriting Process:
- Mortgage Insurance: Often lacks a comprehensive underwriting process, which could mean higher premiums for healthier individuals without risky hobbies.
- Life Insurance: Underwritten based on individual risk, potentially offering lower premiums for those in good health.
7. Medical Assessment
- Mortgage Insurance: Mortgage life insurance often involves just a few health-related queries.
- Life Insurance: In contrast, purchasing personal life insurance requires more time and includes a thorough medical history review.
8. Policy Term
- Mortgage Insurance: Mortgage insurance remains active until your mortgage debt is fully paid off when the policy expires.
- Life Insurance: Term life insurance offers adjustable durations. For instance, if your mortgage amortization is set for ten years, you could opt for a 10-year term life policy to ensure coverage.
9. Portability
- Mortgage Insurance: If you switch lenders, you’ll need to get a new mortgage insurance policy.
- Life Insurance: Life insurance is not tied to your mortgage, so it stays with you even if you change lenders or properties.
Mortgage Insurance vs Life Insurance: What is a Better Choice?
The decision between mortgage and life insurance depends on your needs and circumstances. To make the right choice, we recommend you consult a financial advisor to understand the best option for your situation. Here are some things to keep in mind and consider:
- Financial Flexibility: If you want your family to have options on using the insurance payout, life insurance is the better choice.
- Cost-Effectiveness: For most individuals, life insurance offers more value for the premium paid, especially if you are in good health.
- Coverage Stability: Life insurance provides a consistent coverage amount, which can be more reassuring than decreasing mortgage insurance coverage.
- Health Condition: Securing term life insurance can be difficult if you have pre-existing medical conditions like HIV or diabetes. In such instances, mortgage life insurance could be viable, as it typically involves less stringent health assessments.
Important Scenarios to Consider
Should I Get Life Insurance with a Mortgage?
Absolutely. Life insurance offers a safety net that extends beyond just your mortgage. It provides financial security for your family for various needs, making it a more comprehensive option.
Life Insurance for Home Loan
Using life insurance to cover your home loan offers flexibility. Your family can decide whether to pay the mortgage immediately or use the funds for other pressing financial needs.
Is Mortgage Insurance Necessary with Life Insurance?
While you can hold both policies, paying two separate monthly premiums could be costly and often redundant.
The Bottom Line
Both mortgage insurance and life insurance have their place in financial planning. However, for most individuals, life insurance offers greater flexibility, control, and value. It provides peace of mind, knowing that your family will be financially secure, regardless of the future.