Buying a home will likely be the largest purchase you make in your lifetime, which is why protecting it should be a key part of your overall financial plan. For this protection, chances are someone has suggested you buy insurance—whether it's mortgage life insurance, term life insurance, or both.
What's the difference between mortgage life insurance and term life insurance?
To help you understand some of the distinctions between the two types of policies, the Kanetix.ca team has rounded up a list of some of the most common questions we get and answered them.
|FAQs||Mortgage life insurance||Term life insurance|
|What is it?||Mortgage life insurance is an insurance policy that pays the balance of your mortgage if a person listed on the mortgage dies.||Term life insurance is a policy that provides coverage for a fixed number of years (e.g. a Term 10 is a 10-year policy) or a set age (e.g. Term to 100 offers coverage until you turn 100-years old.) If the person insured dies during the term, then the beneficiary listed will receive the death benefit.|
|When is the policy underwritten?||Some mortgage life insurance policies are underwritten at the time a claim is made (this is called post-claim underwriting) leaving a chance that your claim could be denied.||Term life insurance policies are underwritten upfront, at the time of the application.|
|How much insurance coverage can I get?||The amount of your coverage is determined by the amount of your mortgage.||You can choose any amount of coverage, but the general rule of thumb is to choose five to 10 times your annual, pre-tax income.|
|Who receives the death benefit?||The mortgage lender is the beneficiary and receives the death benefit.||The person you have designated as the beneficiary receives the death benefit. The chosen beneficiary then decides how the money is used. They can use the money to pay off a mortgage, other debts, or help with the day-to-day expenses of the surviving family members.|
|If changing mortgage lenders, does the policy stay in force?||No, usually you will have to get, and qualify, for a new mortgage life insurance policy.||Yes, you own and control the policy so long as you pay the premiums and keep the policy in force.|
|Does the policy stay in force if I sell my home?||No, usually you will have to get, and qualify for, a new mortgage life insurance policy. This could be a deterrent given that many people end up buying 2 or 3 homes over the course of their lifetime.||Yes. Your term life insurance policy stays in effect for the duration of the term, regardless of how often you move. Your policy will stay in force so long as your premiums are paid and you wish to maintain the coverage.|
|Will I always have the same amount of coverage?||No, as you pay off your mortgage the amount of coverage decreases as well. Your premiums, however, typically will stay the same.||Yes, the amount of coverage you have chosen will stay the same for the term of the policy. You can opt to increase or decrease your coverage at any time. If you choose to increase your coverage however, you will have to re-qualify.|
|What happens once my mortgage is paid off?||Without a mortgage there is no longer a need for mortgage life insurance so coverage is no longer available.||Your coverage will remain for your term and for as long as you want to renew that policy, or until you choose to cancel.|
Your financial plan should include term life insurance
Even if you decide mortgage insurance is the way you want to go, a well-designed financial plan should include additional life insurance as well. A mortgage insurance policy only pays off the mortgage and leaves nothing for your other debts or your family's living expenses.