Do you need mortgage insurance? Would life insurance provide you with protection that extends beyond your mortgage? Learn the difference between these types of insurance and which one is best suited to protect your home and your family.
Your home is likely your most important asset. How can you ensure it is protected in case something happens to you? Homeowners have several options:
- obtain mortgage protection through a life insurance policy offered by an insurance company, or
- get mortgage insurance from a bank or mortgage lender.
MORTGAGE INSURANCE OR LIFE INSURANCE: HOW DO THEY WORK?
First and foremost, know that life insurance is an excellent way to ensure that you and your family have mortgage protection.
The money from a life insurance policy is typically paid directly to the beneficiaries — not to the bank or mortgage lender. Your beneficiaries are the individuals you choose to receive this money after your death.
Life insurance policies, such as term life insurance, provide a death benefit. This is the amount of money paid to your beneficiaries after your death. The exact amount depends on the policy you have chosen.
Term life insurance covers you for a specific period (e.g., 10, 15, 20, or 30 years). The premium — the amount you pay monthly or annually for coverage — is usually quite low during the initial period.
If you pass away while covered by your life insurance policy, your beneficiaries will receive a tax-free death benefit. They can use it to pay off the mortgage or for any other purpose. This way, your loan is protected, and your family has funds to cover other expenses you were responsible for.
With mortgage insurance, the balance of your mortgage is paid off in the event of death, up to a certain amount.
The money is paid directly to the bank or lender to repay the loan you were granted. There is no money to cover other expenses, and you leave no amount for your beneficiaries.
WHAT IS THE DIFFERENCE BETWEEN MORTGAGE INSURANCE AND LIFE INSURANCE?
The main difference is that mortgage insurance only covers the balance of your mortgage. The money goes directly to the bank or mortgage lender, so your beneficiaries do not receive a death benefit.
Life insurance, on the other hand, offers more than just protection for your mortgage. Here’s how it works: all life insurance policies provide a tax-free amount (the death benefit) for the beneficiaries. This amount can cover more than just the mortgage. Your beneficiaries could use the remaining funds as they see fit. For example, to cover:
- your other debts,
- childcare expenses,
- funeral expenses, and
- other living expenses.
Before choosing between life insurance and mortgage insurance, it’s important to keep the following distinctions in mind:
WHO RECEIVES THE MONEY?
In the case of life insurance, you can designate the beneficiary of your choice.
In the case of mortgage insurance, the money is paid entirely to the bank.
CAN YOU TRANSFER YOUR POLICY?
With life insurance, you keep your policy even if you transfer your mortgage to another company. And you won’t need to submit a new application or proof of insurability.
Mortgage insurance does not automatically follow you if you change lenders. If you transfer your loan to another lender, you will need to prove that you are in good health.
WHICH OFFERS MORE FLEXIBILITY?
In the case of life insurance, the beneficiaries have the flexibility to cover the balance of the mortgage and much more after your death. As the policyholder, you choose the coverage amount you want, for the duration you want. And this coverage does not decrease unless you choose to reduce it.
When you take out mortgage insurance with a bank, you cannot modify your coverage. You only protect the balance of your mortgage loan.
DO YOU NEED TO TAKE A MEDICAL EXAM TO GET INSURANCE?
When applying for term life insurance with Sun Life, you may need to answer medical questions or undergo a medical exam. Once your coverage is approved, Sun Life will not ask for any additional medical information.
When applying for mortgage insurance, the bank or mortgage lender may ask you medical questions. However, if you make a claim after the insurance is approved, the bank may request additional medical information. This could reveal factors that make you ineligible for the claim payout.
(*The rules governing mortgage insurance and medical questionnaires may vary depending on the bank or financial institution. In some cases, you may not need to provide additional medical information once the insurance is approved.)
DOES YOUR COVERAGE DECREASE OVER TIME?
Life insurance provides protection for your mortgage as well as the opportunity to financially protect your beneficiaries or loved ones. Additionally, the amount of your coverage does not decrease over time, even as you pay off your mortgage.
With mortgage insurance obtained from a bank, the cost remains the same, but the insurance amount decreases as you pay down your loan. If you pay off the loan in full, your coverage ends. There is no money for your beneficiaries.
