Is Mortgage Life Insurance or Term Life Insurance the Best Choice for You?
How to benefit the most from your life insurance policy.
Whether you're buying a home for the first time, or refinancing an existing mortgage, someone has probably suggested you purchase mortgage life insurance. But don't rush into buying a policy until you've looked at all the possibilities. You could end up saving money by purchasing a term life insurance policy instead.
- Related Read: First Time Home Buyer, 8 First Time Home Expenses
- Related Read: Insurance Tips To Help You Save When Buying A House
What is mortgage life insurance?
Mortgage life insurance, also known as mortgage insurance or creditor insurance, is offered by most banks and lending institutions. It is a life insurance policy that pays the balance of your mortgage to the lending institution if a person listed on the mortgage passes away.
- Related Read: Mortgage Insurance and Term Life Insurance: Q & A's
What is term life insurance?
Term life insurance is a policy that provides coverage for a a fixed number of years (e.g. a Term 20 is a 20 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.
Mortgage life insurance vs. term life insurance
Let's say you and your spouse are buying a house and you take out a $400,000 mortgage. Depending on your age and health, the premiums on mortgage life insurance can be much higher than what you would pay for a term life insurance policy. Take a look at these price comparisons for $400,000 in coverage:
Couple aged Monthly bank mortgage
insurance premiums* Term 20 monthly
life insurance rates† 30 $57-$88 $44.46 35 $83-$88 $53.46 40 $126-$136 $75.64
* Based on the posted rates in January, 2016, from the websites of four major Canadian banks.
† Based on the best rates for joint coverage (male and female non-smokers) in January, 2016, using Kanetix.ca. Original rates are shown in annual premiums.
What do all these numbers mean?
These numbers suggest that a couple buying a home can get a better life insurance rate if they chose a term life insurance policy over a mortgage life insurance policy from their lender. While getting mortgage insurance through your lender is convenient, a term life insurance policy might be the way to go if you want to save money.
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Term life insurance offers added flexibility
A term life insurance policy gives you added flexibility over a mortgage life insurance policy:
- The beneficiary of a mortgage insurance policy is the mortgage lender, whereas with a term life insurance policy you designate the person you want to receive any payout. This gives the beneficiary you've chosen the flexibility of using the money in a way they determine to be in the family's best interest.
- Mortgage insurance policies only cover you for the amount of your mortgage you owe to the bank. Typically, as you pay down your mortgage, your coverage amount decreases with it-but your premiums do not, they stay the same. This is called a reducing balance. With a term life insurance policy, you have a constant level of coverage for the whole term and get better value for your monthly payments.
Shop, compare, and save
When purchasing your new home, take the time to shop around for life insurance. Compare the cost of a term life insurance policy to a mortgage insurance policy as well as the options available to you between the two policies. While there are benefits to a mortgage life insurance policy (e.g. your premiums are often rolled up into your mortgage payments making it one less bill to pay), many people prefer the savings, flexibility, and coverage options available to them from a term life insurance policy instead.