Life Insurance vs Mortgage Insurance Canada
Once a homeowner has a mortgage they have now taken on a big financial obligation. How do they protect their loved ones from being burdened with this? In the event of the person’s death? There are a couple of options. Choosing the best option becomes the priority. The two main choices are protection with life insurance. Or, protection with mortgage insurance.
What is Life Insurance?
Life Insurance is comprised of entering into a contract with an insurance company. One that offers life insurance products. There are commitments made on behalf of the insurance company and the life insurance buyer.
The insurance company commits to giving a specified amount of money to the insurance buyer. In return, the insurance buyer agrees to pay a certain amount of money to the insurance company for the purchase of this insurance coverage. It is paid for by way of premiums. In the event of the insured’s death, the amount of life insurance bought is paid out to the named beneficiaries.
What is Mortgage Insurance?
It can get a little confusing when it comes to mortgage insurance. Sometimes it is referred to as mortgage life insurance. Other times it is called mortgage default insurance. For those who want to protect their loved ones financially in the case of death, they want to focus on mortgage life insurance.
Is Mortgage Insurance Mandatory in Canada?
Mortgage insurance can be mandatory in Canada. But, only if the homebuyer cannot put a 20% or more down payment of the purchase price of the home. This is default insurance and should not be confused with mortgage life insurance, which is not mandatory. Although, many mortgage lenders insist on having life insurance on the mortgage. It still does not make it mandatory.
Mortgage Insurance vs Life Insurance
When it comes to life insurance no matter what type is being bought, it should be done by making an informed decision. There are pros and cons to every insurance product. When deciding between mortgage insurance or life insurance it is wise to compare them.
The Value of the Policy
You want to know what you are paying for. In this case, the value is the amount that the insurance policy is worth.
There are no options as to how much you can buy. The value of the policy will be the amount that is owed on the mortgage. Each month you will be making mortgage payments. As this is done the amount owed on the mortgage decreases. So does the value of the insurance policy. It will decrease according to the amount of the mortgage owed.
When you buy a life insurance policy, you get to choose how much you want to buy. Once you do the value of the policy does not change.
Who Get the Insurance Money Upon the Insured’s Death?
When an individual passes away the insurance goes to the named beneficiary.
The beneficiary on the mortgage insurance is automatically the lender of the mortgage. Upon death, the policy amount goes to the lender to pay off the mortgage.
The life insurance payout goes to whoever the insured named as beneficiary. It is up to them what they want to do with the proceeds.
Terms of the Policy
With life insurance, there are many different types of life insurance products to choose from.
There are no options for buying different types of life insurance. The mortgage insurance is just one set type of life insurance. One that decreases in value as the mortgage decreases.
One of the many choices is term life insurance. Within this category, there are several options as to the terms. These policies vary in duration. They can be for five or ten years. Or, even twenty if that is what the insurance shopper wants.
The purchase of insurance means making payments on it called premiums. Insurance companies will give choices of how these are paid.
There is no choice in the amount of how these payments are made. They will be made with each mortgage payment.
There may be options of how the payments are made. Some like to pay their insurance by the year. Others prefer to pay monthly. Then there are others who pay quarterly.
When people buy insurance, they want the coverage to remain in place for the duration of the policy.
When an individual pays off their mortgage, the insurance automatically becomes null and void. Payments have been made into this insurance with no long-term benefits.
Life insurance stays in place no matter what an individual does or where they live.
There are rules and regulations when it comes to life insurance.
Even though the mortgage lender is selling you the insurance, they are not compelled by law to be licenced to do so.
To sell individual life insurance policies an individual or company has to be licenced to do so.
When an applicant is seeking to buy life insurance they must fill out an application. Then the insurance policy gets underwritten.
The mortgage insurance provider will ask for an application to be filled out. But, they may not confirm all the information that is on the application. There could be answers there that would prevent someone from being insurable. In some cases, this is not determined until the death of the insured. Then the insurance company reviews the application. At this time based on what they find they may refuse to pay out the mortgage.
Life insurance bought as private insurance goes through a stringent approval process. The insurance company will carefully review the application before issuing the policy. This dramatically cuts down the possibility of the payout being denied.
Mortgage Life Insurance Canada Facts
Mortgage life insurance is not cheap to buy. Many individuals don’t realize how much they are paying. The payments get blended in with the mortgage payments each month. Individuals get used to paying this amount and often forget that a portion of their mortgage payments is going towards insurance. They only realize this when they do a review of the principal owed on their mortgage. They are often disappointed thinking that it should be lower than what it is. Basing it on the total of the monthly payments made.
Why Do People Buy Mortgage Insurance?
There appears to be a lot of negative aspects about buying mortgage insurance. But, there are a lot of people that purchase it. There are a few reasons why they do this.
They are not informed. Many people are not insurance savvy. They don’t realize that there may be other options.
It is convenient. When one is sitting there filling out their mortgage papers, it is convenient. At the same time, they can quickly fill out the insurance application. It is then done and over with. They don’t have to use the extra time to shop for insurance.
They think it is mandatory. Individuals buying a home for the first time are not aware of what is and what is not mandatory. They may have heard that you have to have life insurance. They get confused with mortgage default insurance. Which is mandatory if the down payment is less than 20%. But this is not life insurance. So individuals assume that they must have life insurance as well in the case of the mortgage borrower’s death.
Easier Payments. A lot of people like the fact that the payment is blended in with the mortgage payments. They don’t have to give it any more thought. There are no extra payments to make which some people think is a hassle. Yet with a private life insurance policy arrangements for premium payments can be made with automatic withdrawal.
Shopping for Life Insurance is Hassle Free
It is no big deal to shop online for life insurance. This can be done by getting some life insurance quotes. Then comparing this to see which is the cheapest but the best.