Unless you have big dreams of owning a private island or a sports team, your home is probably one of the biggest investments you’ll ever make. That’s why it’s important to think about life insurance when you buy a home.
Why Do Homeowners Need Life Insurance?
Many people think life insurance is confusing and complex, like a crossword puzzle that makes you want to pull your hair out! So although people know they need life insurance, they’d rather not think about it.
In reality, though, life insurance isn’t as confusing as you may think. The purpose of life insurance is pretty simple: it protects those who are financially dependent on you in the worst case scenario.
What do we mean by this?
Let’s say, for example, that you and your partner recently bought a house. You borrowed money to pay for the house and now owe monthly payments on your mortgage. When you qualified for your mortgage, you probably assumed that both of you would contribute to these mortgage payments. So without you in the picture, your partner may need to make a lot of sacrifices to make these payments. And in the worst-case scenario, he or she could even lose the house. Life insurance is there to make sure this doesn’t happen.
Term Life Insurance vs. Mortgage Insurance
As a homeowner, you may come across two types of life insurance when you start your search: mortgage life insurance and term life insurance (very descriptive, we know). Below, we’ll break down the differences between them so you have a better understanding of what they are!
Mortgage Life Insurance
Mortgage life insurance is a policy that pays off the balance of your life insurance policy if you pass away. It’s often sold through a bank or mortgage lender. Mortgage insurance may seem like a good financial product, but there are a few drawbacks we don’t like about it.
The first is that it has a declining coverage amount. You see, with mortgage life insurance, your payout is actually tied to your mortgage. This means that as your mortgage gets paid off, your mortgage life insurance coverage actually goes down (but your premiums remain the same!). This could leave your family seriously underprotected later in life if they need money to cover other expenses.
The second (and most important issue) is that mortgage life insurance is like a plane ticket—it isn’t transferrable. This means that if you move your mortgage to a new lender, you’ll have to reapply for insurance. And it can leave you paying much higher rates. With term life insurance, your insurance won’t change if your mortgage lender changes.
Term Life Insurance
Although term life insurance is similar in structure to a mortgage life insurance policy, it gives you a lot more flexibility! The policy works like this: if you pass away, your insurer guarantees that your total coverage amount (this is the amount specified in the policy contract) will be paid to your family in one tax-free lump sum.
Why do we think it’s the better deal? There are two key reasons:
First, you can purchase the coverage amount that makes sense for your family (regardless of your mortgage amount). Specifically, with a term life insurance policy, you can buy enough coverage to meet all of your family’s needs—not just repayment of the mortgage. Additionally, the length of a term life insurance policy isn’t tied to your mortgage—it can be as long as you need it to be (10, 20, or even 30 years).
Second, life insurance is there for as long as you need! With term life insurance, your insurance will stay in place whether or not your mortgage lender changes.
Understanding these key differences in insurance coverage is crucial in ensuring home buyers make an educated decision to best protect their home investment, with their families’ needs in mind.
Insurance shoppers can get a personalized recommendation on the right policy using PolicyMe’s life insurance checkup. By providing just a few pieces of personal information, like your age, gender, and basic financial information, you can build your customized plan and see how much it’ll cost—all in just 5 short minutes!
Already know what you’re looking for? Get a life insurance quote with PolicyMe by answering 3 simple questions. Remember that with our platform, you can compare prices from Canada’s most trusted life insurance companies for free. If you’re unsure of which insurance carrier you should go with, be sure to check out our life insurance reviews here, which will help you find the best life insurance company for you.