When it comes to insurance, some people have coverage for everything.
However, not everyone has the money for that kind of option. For some people, it’s a matter of choosing the few policies that are best for their situation.
When it comes to life insurance and mortgage insurance, some people choose to opt for one over the other. What is important to note, is that each type of policy covers something different.
In most cases, one policy cannot stand in for another. But what about these two options?
To help homeowners get a better idea of what they should be paying for, the following information will compare life and mortgage insurance.
By doing so, people may be able to make a smarter decision about their money and protection.
What is Life Insurance?
Life insurance is an agreement between a person or group, and an insurance company. The insured agrees to pay premiums, and the company promises to gift a lump sum at their death.
People get life insurance for all kinds of reasons. Some people get it to protect their families and homes, while others get it to cover their funeral fees.
In most cases, life insurance protects loved ones from financial trouble when the main income-maker passes. This means having a consistent income that helps with mortgages and taking care of any debt.
Types of Life Insurance
Life insurance offers two categories: Term life and whole life.
Term life is the cheapest option, and it covers policyholders for a certain number of years. (E.g. 5, 10 or 50 years). The policy only pays out if the insured dies within that time frame.
Whole life insurance is more expensive but offers more options. The policy covers the insured until they die, and cash grows over time.
Whole life comes in a range of policies, each with options for investing, borrowing, setting premiums and more.
The more add-ons or riders a life insurance policy has, the more expensive the pricing becomes. In 2016, total premium revenue in Canada totaled $106 billion, with life insurance premiums totaling $20.3 billion.
Year-over-year growth was led by life insurance, totaling an almost 9.8% increase.
What is Mortgage Insurance?
Mortgage insurance is another insurance policy. This type of policy provides money for lenders or investors (not homeowners) for any loss that occurs due to a mortgage loan default.
In this case, it is not the person choosing to buy insurance, but rather the bank or financial company. This happens when a homeowner buys a home with a down payment lower than 20%.
Premiums add to the homeowner’s monthly payments.
Mortgage insurance costs depend on two things:
- Type of mortgage applied for
- Down payment amount
Keep in mind, that Mortgage Insurance is not the same as Mortgage Life Insurance.
Mortgage Life Insurance was created to help homeowners pay mortgage debt. This is acceptable if the homeowner dies, or if they acquire a long-term disability.
Mortgage Insurance is also different from Owner/Property Insurance. The latter is used to protect a home against damage, theft, fire, loss, etc.
Advantages and Disadvantages of Life Insurance
When it comes to life insurance, the insured is taken care of for the entire duration of their policy. With term life, it is a certain number of years, while whole life never ends.
The money paid out to a beneficiary never changes, no matter how much mortgage has been paid off in the process. Similarly, the insurance never ceases, even if the insured sells their home, changes lenders or renews their mortgage.
In terms of disadvantages, anyone who has to renew their term life insurance will likely end up paying much higher premiums. The older the person is, the more they can expect to pay.
It is also a requirement for most companies that a person gets a medical examination before their policy can be approved. If someone says no, their prices will already experience a spike.
Advantages and Disadvantages of Mortgage Insurance
There are only a few Canadian mortgage insurance lenders, which is acceptable since far more Canadians opt for life insurance.
Mortgage insurance is easy, and the premiums never increase. It’s a great way for banks to feel confident that they’ll be covered for what they lent.
However, mortgage insurance is usually more expensive than life insurance, and the payout shrinks as the mortgage payments go down.
Any time a mortgage is renewed (usually every 5 years), the mortgage insurance policy is renewed as well.
Who Benefits from Mortgage Insurance?
Homeowners who cannot afford to pay a down payment of at least 20% on their home can benefit from this type of policy.
Although they have extra expenses each month, they are also given the chance to own a home.
Life insurance and mortgage insurance are not very similar. While both put premiums on the insured, life insurance is a personal choice, while mortgage insurance is required by the bank or lender.
For those who can put down at least 20% on their home, mortgage insurance is not necessary. In fact, it is definitely a better decision, since it can still help with mortgage payments even after the insured passes.