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When it comes to mortgage insurance vs life insurance, which is the better choice?
Term life insurance can give you the same protection as mortgage life insurance, with more flexibility and at a lower cost. Let’s get into the reasons why it’s a better choice for most Canadian families.
So, what is mortgage life insurance and what is term life insurance? Can they protect your spouse and kids in the unlikely event that you pass away? Here are the key differences between these two types of insurance and how they work.
Watch the video below to learn about how term life insurance is different from mortgage life insurance.
In other words, it depends. Mortgage insurance will last as long as you owe money on your home (20 to 30 years), while you can choose how long your term life insurance policy will last.
Both mortgage life insurance and term life insurance cover different things. While they both pay out a benefit in the unlikely event that you pass away, there are some key differences.
Mortgage life insurance can only be used to pay off your mortgage. As you pay off your mortgage, the death benefit decreases but your premiums stay the same.
The amount of your benefit from mortgage life insurance will be equal to whatever the remaining balance on your mortgage is, which means it decreases over time as you’re paying it off.
Another important note is that many people think that their family receive the final payout with their mortgage insurance. The truth is when you buy mortgage insurance, any payout will flow out to your mortgage lender, not to you or your family like life insurance does, says Global News. This means that mortgage protection insurance won't always pay out the death benefit to your loved ones. Especially if there is any outstanding balance on your mortgage payment.
General life insurance on the other hand will usually pay out regardless of any outstanding balance, this is why traditional life insurance policies are considered a better option for folks with assets they would like to keep.
“With mortgage life insurance, the death benefit is paid to the bank and your family doesn’t ever see the money.“ explains Laura McKay, Certified Life Insurance Advisor and COO and co-founder of PolicyMe.
Term life insurance can be used according to your family's wishes; it can cover the balance on your mortgage, help with funeral expenses, pay for private school, handle medical costs or go into a retirement fund for your spouse.
Term life insurance enables your family to use the money in any way they’d like. For example, they may choose to pay off the mortgage or use the money to pay for a child’s university tuition. It gives your family flexibility to use the money in the way that makes the most sense.
PolicyMe combines flexibility and affordability to offer some of the most competitive rates in Canada, making term life insurance accessible to families of all kinds.
Get a no-obligation quote and start your application in less time than it takes to reheat your leftovers.
The main gist of how mortgage and life insurance differ is that life insurance covers any purpose with a death benefit, while mortgage life insurance specifically pays off a repayment mortgage.
Mortgage life insurance can cost a little over double the amount you'd pay for term life insurance.
Mortgage life insurance premiums aren’t underwritten, meaning they don’t consider your individual risk. So even if you’re a healthy person without high-risk hobbies, you will likely overpay for insurance if you choose a mortgage insurance policy.
An important note on mortgage life insurance cost: it stays the same, regardless of the amount of your mortgage balance. So you don't pay less as you pay your mortgage down – even though the payout shrinks with every mortgage payment.
Unlike mortgage life insurance, term life insurance is underwritten; so most Canadians will end up paying much less for term vs mortgage insurance. For example, here's what a 35-year-old non-smoking woman would on average pay over a 25 year term for $500K in coverage:
The end result: an average savings of $12,285 over the course of the policy.
Why is term so much more affordable? The insurer considers your individual risk when setting your premiums. Assuming you’re not a smoker or a skydiver, your premiums will cost much less than the “one size fits all” rates used with mortgage life insurance.
When you get a term policy, the premium will stay the same for the length of the term, as will the death benefit.
A medical exam is not needed for mortgage insurance, making it a type of no medical insurance.
“One of the selling points of mortgage life insurance is that it’s easy to get,” says Laura. “That’s because the policy isn’t based on a health assessment or any evaluation of your individual risk.”
The drawback to this approach? The life insurance company assumes everyone has the same risk (high) and charges premiums accordingly.
With PolicyMe, you might not even be required to do a medical exam. Many of our eligible applicants don’t require additional medical follow-ups.
Of course, some folks need to do a medical exam before getting approved. But we make it convenient, quick and easy. And we cover all the costs so you don’t have to.
If you change mortgage providers, your current mortgage insurance policy will end.
It’s common to move your mortgage from one company to another when your term is up, so it’s important to remember your mortgage insurance won’t transfer over.
You’ll have to set up a new mortgage life insurance policy tied to your new mortgage. And since you’ll be older, rates are likely to be higher.
In contrast, because term life insurance isn’t tied to your mortgage, it isn’t affected when you change mortgage providers.
It’s a good idea to have a financial safety net that will pay off your mortgage if you pass away. But that doesn’t necessarily require mortgage insurance. For many families, term life insurance can serve this need and is the better choice. Term policies are more affordable and pay out directly to your beneficiaries, who can use the money for the mortgage or their other needs as they see fit.
For some people, an existing medical condition, like HIV or diabetes, can make it difficult to get term life insurance. If that’s your case, mortgage life insurance might make sense.
Because insurers usually don’t perform detailed health assessments for mortgage life insurance, you’re more likely to get approved.
Want to compare term life insurance to other types? See our guide on term versus whole life insurance.
You don’t necessarily need mortgage insurance if you have life insurance. Both serve to protect your loved ones financially, but they do it differently. Mortgage insurance pays off your remaining mortgage if you die, but the lender gets the money, not your family. Life insurance, on the other hand, gives your beneficiaries a tax-free payout they can use for any purpose, including paying off the mortgage, covering daily expenses, or saving for future needs.
For many Canadians, life insurance offers more flexibility and better value. With life insurance, your family decides how to use the money, giving them the freedom to address various financial needs. Plus, life insurance premiums often remain level, while mortgage insurance premiums can increase over time. By opting for life insurance, you ensure broader protection for your family's financial future, not just the mortgage.
Mortgage insurance doesn’t pay a death benefit like life insurance does. Instead, mortgage insurance pays off the remaining balance of your mortgage directly to the lender if you pass away. This means your family won’t receive any money directly, but they will be relieved from the burden of paying off the mortgage. It’s a targeted protection that ensures your home is paid off, but it doesn’t provide additional financial support for other expenses or future needs.
On the other hand, life insurance pays out a lump sum death benefit to your beneficiaries. Your family can use this money for anything they need, whether it’s paying off the mortgage, covering daily living expenses, or saving for the future. It offers more flexibility and can be tailored to your family’s specific needs. For Canadians, this flexibility is crucial, especially considering the high cost of living and the need for comprehensive financial protection. With life insurance, you’re giving your loved ones the freedom to decide how best to use the money during a difficult time.
Nothing happens to a term life insurance plan if your mortgage is paid off. You’ll continue paying the same premiums, and your death benefit will remain the same. If you pass away after fully paying off your home, your family will have more money for their other needs and living expenses.
In contrast, a mortgage insurance policy ends when the mortgage is paid off. With no active coverage, there’s also no payout if you pass away.
Ideally it is important to find the best life insurance policy as it can help pay off more than just your mortgage. Visit PolicyMe to determine what policy is best suited for your needs.
