WHAT IS MORTGAGE INSURANCE?
Mortgage insurance is offered by most banks and lending institutions. They will offer it to you when you get a mortgage or refinance an existing one.
“Mortgage ‘life’ insurance” is an insurance policy that pays the balance of your mortgage to the lending institution if you, the person listed on the mortgage, pass away.
Mortgage insurance provides a life insurance amount equal to your remaining debt. As your mortgage decreases, so does the payout your life insurance contract provides.
The cost of the insurance is based on the mortgage amount and your age at the onset of the mortgage, and the payments remain constant through the life of the life insurance policy contract. Essentially, you are paying the same monthly premiums for a reducing amount of coverage as you pay down your mortgage.
What is traditionally described as “mortgage insurance” is great for the lender, because it (they) is (are) listed as the beneficiary of your policy.
HOW DOES TERM INSURANCE COVER MY MORTGAGE?
There is another planning approach that will address concerns for “insuring a mortgage.” Term life insurance provides protection for a specified period of time. A death benefit is paid to your beneficiary if you die while the policy is still in force.
When you purchase a term life insurance policy you are covered for the full amount of your mortgage – not just the outstanding balance – for the life of the policy. That means you have a constant level of coverage for the whole term of the life insurance contract.
Term life insurance is usually cheaper and you select your beneficiaries, versus having the beneficiary designated by the lender – as the lender. The proceeds from your term life insurance contract can be used, as well, in any way your beneficiary deems necessary – not just to repay your mortgage. This can be an important benefit of having your mortgage insured by a personal life insurance contract at the time of a claim against the contract.
YOUR BEST OPTION
When buying a new home, or when renewing or replacing a mortgage, is the perfect time to purchase term life insurance to protect your mortgage and your family (although the issue can be examined and explored at any time during the life of a mortgage). Based on its flexibility, coverage and price, term life insurance is often a superior option, when compared to “mortgage insurance.”
COMPARING MORTGAGE AND TERM INSURANCE
I PAY THE PREMIUMS, SO I OWN THE POLICY, RIGHT?
Term Insurance: Yes. You own the policy and you name your beneficiaries.
Mortgage Insurance: No. You are part of a group policy and the lender is the beneficiary.
IS THE COVERAGE FLEXIBLE?
Term Insurance: Yes. You choose the coverage you want, regardless of your mortgage balance. You can increase or decrease your coverage, renew your coverage and convert to permanent protection. If you renegotiate or pay down your mortgage, or sell your home, you can continue or discontinue your coverage.
Mortgage Insurance: No. The lender will only insure you for the amount of your mortgage. You cannot alter, renew or convert the policy. If you move your mortgage to another lender, you cannot transfer the policy – which can result in increased costs incurred to replace the coverage lost when the mortgage account is moved. Your coverage ends when the mortgage is paid off or ends.
CAN MY BENEFICIARIES USE THE PROCEEDS FROM THE POLICY FOR SOMETHING OTHER THAN PAYING OFF THE MORTGAGE?
Term Insurance: Yes. Upon death, the proceeds go directly to your named beneficiary (or beneficiaries), who then decides (decide) how to best use the money.
Mortgage Insurance: No. Upon death, the benefit (usually reduced) goes directly to the lender to pay off the mortgage.
IS THE COVERAGE GUARANTEED?
Term Insurance: Yes. Your insurance and premiums are guaranteed for the life of the policy. Only you can cancel or make changes to your policy.
Mortgage Insurance: No. Your premium and benefits are not guaranteed. Your lender can make changes at any time.
I LOOK AFTER MY HEALTH AND DON’T SMOKE. WILL THAT MAKE A DIFFERENCE TO MY PREMIUMS?
Term Insurance: Yes. The premiums you pay are based on your age, health and smoking status.
Mortgage Insurance: No. Since the mortgage insurance is usually provided in the context of a group life insurance plan, you pay the same premiums as everybody else.