Mortgage Insurance

You’ve made the biggest purchase of your life, a new home for you and your family. How can you make sure the burden of your mortgage is handled should something happen to you?

There are two types of available insurance coverages that relate to protecting your mortgage investment. These options are mortgage insurance and term life insurance. Knowing the difference between the two is important as they operate in very different ways. This article will explain the difference between the two and help you choose the one that’s right for you.

What is Mortgage Insurance?

Mortgage insurance, also known as mortgage life insurance and creditor insurance, is a policy that pays the balance of your mortgage to the bank if a person listed on the mortgage is unable to pay, passes away, or cannot meet the mortgage obligations for another reason. It pays off that loan so the liability of debt is not left on the people you live with and care about.

You can purchase mortgage insurance from your mortgage lender or a bank and roll it into your monthly mortgage payments. You are often approved for this insurance by filling out a simple questionnaire which includes a few basic health questions. Each time you renew your mortgage or change lenders, you will have to renew your mortgage insurance policy.

Cost & Payout

Typically mortgage insurance is more expensive than term life insurance. Your premiums will stay the same for the length of time your insured, even as you pay off your mortgage. The amount of coverage also declines as you pay down your mortgage balance which means you could be paying a higher premium for a smaller payout.

You May Not Be Covered in the End

The convenience of mortgage insurance, unfortunately, comes at a cost. The most important thing to remember is that although you are paying the premiums, you are not necessarily going to be covered in the event of a claim. Instead of doing the proper investigating necessary to ensure you in the first place, these policies use post-claim underwriting, meaning that they will delve into your medical history after a claim is made. If you have a health condition (aware of it or not) at the time of signing the papers and it is not disclosed, your claim can and most likely will, be later denied. This means, despite the fact you’ve been paying the premiums, no benefits will be paid out. Read how this widow was denied her claim here.

What is Term Life Insurance?

Term life insurance offers the same protection as mortgage insurance, but it acquired through an insurance broker rather than a bank or mortgage lender. It requires a more detailed health screening where you may need to share a blood/urine sample and provide your doctor’s contact information. Term life insurance is also portable. It is attached to you rather than your debt so you won’t need to take out a new policy if you decide to switch lenders.

Cost & Payout

Depending on your age, smoking status and overall health, the premiums on term life insurance can end up being much lower than a mortgage insurance policy. The difference in these costs typically becomes more pronounced as you age.

Typically term life insurance covers you for a specified term of 10, 20 or 30 years and the amount your beneficiaries receive if you die, will remain the same through the entire life of the policy.

Which Should I Choose?

While mortgage insurance is much more convenient and doesn’t require any medical exams, it typically comes with higher premiums and a smaller payout than term life insurance.  According to Scotia Bank, a 26-year old that carries a $500,00 mortgage will pay about $55 per month for mortgage insurance while a 26-year-old non-smoking male pays about $25 per month for term life insurance. That’s more than double the monthly premium for mortgage insurance!

Term life insurance also has the advantage in terms of the renewal process. If you sell your home or renew your mortgage, you are required to renew your mortgage insurance policy. With term life insurance, your policy stays with you, even if you decide to move, renew your mortgage or change lenders.

Although the bank can ease the stress of applying for mortgage insurance, the lower premiums, higher payout, and portability make term life insurance the preferred choice for most people.

If you are interested in life insurance, apply for a quote today with Algoma Insurance Brokers.

Author:
Algoma Insurance Brokers