There are many compelling reasons already to purchase term life insurance, as anyone with young children or other family dependents knows. It protects your family and loved ones if anything unexpected happens to you – but it’s not the first thing on a new homeowner’s mind when they think about protecting their new house. Maybe they should reconsider.
If you’re searching for a new home, it’s likely your lender is recommending you purchase mortgage insurance. As life insurance professionals here at PolicyAdvisor.com, with years of experience helping homebuyers like yourself make informed insurance decisions, we have a better recommendation, and that’s purchasing life insurance for your mortgage protection.
Life Insurance vs Mortgage Insurance
Life insurance provides a financial cushion for your loved ones when you die, especially if it’s premature or unexpected. Mortgage insurance offered by your bank over-promises and under-delivers: It only pays off your mortgage debt under similar circumstances. Consider buying term life insurance in the amount of your mortgage instead.
Why? We thought you’d never ask. The best way to determine whether term life insurance for mortgage protection is the better choice is by making a fair comparison.
1. Your Premiums are Lower
Mortgage insurance premiums are typically higher than those for term life insurance. Worse still – mortgage insurance premiums increase with your age. The reason: with mortgage insurance, there is no personalized risk assessment on your life.
While the procedure for applying for mortgage insurance through your bank appears simpler, it ends up increasing your cost of insurance. Much more work goes into underwriting term life insurance; the insurance company knows more about the risk of covering you, and is therefore able to give a more accurate and a mostly lower price that stays the same throughout the length of your mortgage.
2. Your Insurance is Portable
If you sell your current home and buy a new one – or if you refinance your home through a different lender, or even if you renew your mortgage with your existing lender – you have to start from scratch and buy a new mortgage insurance policy. The mortgage insurance policy offered by your bank does not move along with your mortgage. That’s a benefit only available with term life insurance, which stays with you for the length of the term you choose, even if you switch your lender or change your financing terms.
3. Your Coverage is Consistent and Guaranteed
As you pay down your mortgage, the amount of your mortgage insurance coverage also goes down. A lower mortgage payout must mean lower premiums, right? Well that’s not true – in the case of mortgage insurance, your premium stays the same, even as your coverage reduces.
With mortgage insurance, if you pass away when your mortgage has only a few years left until it ends, the payout isn’t significant, while the premiums stay as high as they were when you obtained or renewed the coverage.
On the other hand, with term life insurance the policy amount and premiums remain the same over the policy term. The payout would be the same whether it is year four or year 24 of your amortization period.
An added bonus? Your coverage is guaranteed when you protect your mortgage through term life insurance, as the insurance company has completed its underwriting when issuing the insurance contract. In the case of mortgage insurance offered by your bank, the insurer does underwriting at the time of claim, and can at that time declare to your dependents that you were ineligible for the mortgage insurance that you had paid for years. Ouch.
4. You Choose your Beneficiary
Term life insurance pays out to the beneficiaries of your choice, most likely your family, but truly anyone you choose. It serves to protect them when you are no longer around. Mortgage insurance, on the other hand, isn’t really designed to protect your family. It’s designed to ensure the bank receives the money they are owed for your home; the fact that your family may benefit from paying off the mortgage is secondary.
It’s quite clear, term life insurance holds significant advantages over mortgage insurance.
We would be remiss not to include the one minor downside to term life insurance in comparison with mortgage insurance. The latter is a simpler procedure. When you close on your home, you can arrange for insurance that same day through your bank or lender with no medical exam. Term life insurance requires more information (like your medical and family history) and work, but many of the steps can be carried out on your tablet or phone. While not instant, the process usually goes smoothly and relatively fast.
And considering the money you can save and
PolicyAdvisor.com is an innovative Canadian online insurance broker providing a digital solution to an archaic industry, combining modern technology, intuitive design, and real-world expertise to make insurance buying simpler, straightforward, and stress-free. Visit www.policyadvisor.com to access our free online insurance calculators and find out how you can save money when comparing and buying insurance online.