If you’re in the process of buying a house, you might be asked about whether or not you want to purchase mortgage protection. Getting protection for your family in the event of your death seems to make a lot of sense. After all, your family wouldn’t have to worry about mortgage payments if something happened to you and they lost your income. So it may even seem foolish to pass on mortgage protection.
However, term life insurance is usually a better choice (and usually the cheaper option too). Let’s talk about the pros and cons of mortgage protection vs. term life insurance.
Table of contents
- What is mortgage protection?
- What is term life insurance?
- Mortgage protection vs. term life insurance
- Should you buy mortgage protection or term life insurance?
- When might mortgage protection make sense?
- How to shop for term life insurance
What is mortgage protection?
Mortgage protection or mortgage life insurance is typically sold by banks or your mortgage lender. The policy works like this: if you pass away, your insurer guarantees that the remainder of your mortgage will be paid off so that your family can stay in the home.
Important side note: Mortgage protection insurance is different from insurance through the Canada Mortgage and Housing Corporation (CMHC), which protects your lender (not your family). This is something that’s mandatory if you put less than 20% down on a home. It ensures that your mortgage lender won’t lose all their money if you stop making payments on the loan. Lenders need protection too!
What is term life insurance?
Similar to mortgage protection, term life insurance can help ensure that your mortgage gets paid off. So it’s still worth considering even if your mortgage is the main expense you’d want to be covered for. 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.
With a term life 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).
Mortgage protection vs. term life insurance
Mortgage protection insurance and term life insurance fundamentally operate in the same way. You buy a policy, you make monthly payments, and in return, your insurer guarantees that a death benefit will be paid if you were to pass away.
However, there are some key differences to be aware of if you’re choosing between the two:
Who benefits from the insurance protection?
With mortgage protection, your mortgage lender is the beneficiary and uses the life insurance proceeds to pay off the mortgage. With term life insurance, your family is the beneficiary and can use the money to do whatever they want with it (whether that’s paying off the mortgage in full right away or just continuing to pay down the mortgage through monthly installments).
What happens if you change mortgage lenders?
Mortgage protection 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. This can leave you paying much higher rates. With term life insurance, your insurance will stay in place whether or not your mortgage lender changes.
How does your coverage amount change?
With mortgage protection, your coverage amount will decrease as your mortgage gets paid off (even though your premiums will stay the same!) So if you have only $25,000 left on your mortgage, that’s all your family will get if you pass away. With term life insurance, on the other hand, your coverage amount is fixed. This means that if you apply for $500,000 of coverage, that’s what will be paid out.
So even if math isn’t your strength, you’ve probably noticed that in general, term life insurance gives you more bang for your buck!
Do your premiums ever change?
With both mortgage protection and term life insurance, your premiums will stay the same for the duration of your policy.
When might mortgage protection make sense?
Mortgage protection may be a good option if you have a health condition and don’t qualify for term life insurance but still need coverage for your mortgage. In general, the underwriting requirements for mortgage protection are less stringent than those for term life insurance.
How to shop for term life insurance
There are several websites and online platforms that help you get and compare life insurance quotes. Of course, these immediate price quotes are usually estimates and are based on only 3 factors: your smoking status, your age, and your gender.
Remember, though, that the first step to buying life insurance is figuring out how much you actually need. This amount depends on your household (having a spouse or kids who depend on you) and your financial situation. For example, do you have debts to pay? Will your family need to replace your income to cover their everyday living expenses? Do you want to fund a college education for your children?
Looking for advice now? Take PolicyMe’s life insurance checkup today to get a personalized recommendation on how much life insurance you need!
This article was written by PolicyMe – The easiest place to get advice, compare life insurance quotes & buy life insurance online.