Getting life insurance coverage for your mortgage can be a daunting task. Let’s start with the name.
Life insurance, mortgage insurance, creditor insurance, mortgage life insurance, mortgage protection are just some of the names out there.
These products can be provided to you by:
- a mortgage broker
- your bank
- an independent life insurance broker
- a wealth of other sources and dealers
Yet, the goal remains the same: to provide you with coverage and insure your mortgage and your life.
Options however tend to vary and can get confusing at times, but something is better than nothing. When buying a home or starting a family, insurance coverage is a must in one way or another. Below we will break down some of the key differences to consider when evaluating between getting mortgage life insurance and life insurance.
One thing to note before we outline the differences is that mortgage loan insurance and mortgage life insurance are two different things.
As with most financial products they can get confusing if you do not investigate the details. If you buy a home with a 20% or less down payment, your lender requires mortgage loan insurance to protect against a possible default. For simplicity, we will focus on mortgage life insurance for the rest of this post.
- Term life insurance is almost always cheaper. It can cost up to 60% less compared to mortgage insurance, depending on the type of policy you get.
- Term insurance provides coverage for your beneficiary and more flexibility for how the benefit is spent. With mortgage insurance, your protection declines over time, and benefits are paid out to the lender (rather than your beneficiary).
- While mortgage insurance is easier to get, life insurance protection is often superior. It ensures your loved ones receive the full face coverage amount and reduces uncertainty during the post-claims process.
Differences Between Mortgage Life Insurance vs. Life Insurance
To get started, let’s cover a few key differences, including:
- Mortgage life insurance is easier and often more expensive to apply for
- The value of a mortgage life policy changes overtime
- The lender gets paid out with mortgage life insurance
- Life insurance provides more flexibility & portability
- The post-claim underwriting process differs between the two
- Life insurance always pays out the full face value
Mortgage life insurance is easier and often more expensive to apply for
Mortgage life insurance can be easy to get with your mortgage with sometimes as little as a signature.
Life insurance can be a bit more intensive. Sometimes it requires a paramedical exam (which can include blood urine and EKG). Luckily, excellent non-medical options exist with our partner companies like Manulife and Canada Protection Plan though they can sometimes be more expensive.
When you go through the medical process, the insurer has more, quality data to assess your health and risk profile. This is one area that shows a large difference between life insurance and mortgage life insurance.
With life insurance, you are paying a price that is more in line with your health or life situation. Whether the policy includes medical or non-medical options, the questions that are being asked to assess your coverage will result in a price that is more in line with you as an individual.
With mortgage life insurance, assumptions are being made by the bank or lending institution that group you, the individual, into a group classification, and your coverage is priced accordingly.
To show you a quick comparison, here are a few insurance prices we compared:
Mortgage life insurance compared to Term life insurance rates
The value of a mortgage life policy changes overtime
Value is dictated by striking a balance between the cost and the benefits you receive.
The benefit you receive from a mortgage life insurance product is on a declining scale. Over time, your payout gets reduced, but you pay the same amount. Your mortgage protection coverage also comes to an end when your mortgage is paid off.
With life insurance, your coverage remains the same for the term (length) of the policy, regardless of if you pay off your mortgage.
The lender gets paid out with mortgage life insurance
The beneficiary of your insurance product is the lender covering the remainder of the mortgage amount. Conceptually you are insuring your lender’s risk by buying a mortgage life insurance product.
With life insurance, you choose your beneficiary and they get paid out the face value of your policy. The difference is a subtle but important one. If your primary insurance coverage is through mortgage life insurance, you are paying into a product, where the bank is the only beneficiary, but you may not have taken your family's priorities into consideration.
With life insurance, you can assign the beneficiary to ensure the proceeds of your coverage are allocated appropriately. For example, if your spouse is your primary beneficiary, they may need the proceeds of the policy to maintain a quality of life. This includes mortgage protection but doesn’t stop there.
It is important that you speak with an insurance advisor to properly assess your family’s needs in the event of a tragedy. It should also be mentioned that if you buy a critical illness and/or disability product, you personally are the beneficiary of that product.
Life insurance provides more flexibility & portability
Life insurance is a product that is meant to provide you with peace of mind throughout your life.
If your circumstances change such as renewing your mortgage with a new provider, buying, or selling your primary residence, you need that coverage to be maintained with you through those processes.
With mortgage life insurance, even though you pay into it on a regular basis, the coverage doesn’t always go with you through these life events. In many of these cases, in order to re-establish coverage, additional medicals assessments will be required, and if your health has declined over this time, it will be more expensive to re-establish coverage.
Life insurance on the other hand stays with you, throughout life’s changes. It is important to maintain regular contact with your insurance advisor to ensure your priorities are still covered during those changes and in many cases, there are options that allow a policy to ‘grow-with-you.'
People aren’t static and their needs change. Life insurance can provide conversion options to give you more flexibility over singular static products like mortgage life insurance.
The post-claim underwriting process differs between the two
To qualify for a mortgage life insurance product, the prospective insured is asked a series of questions. If they answer the questions correctly, they will be approved for coverage on the spot.
During these questionnaire's you work with your financial institution representative whose primary interest may be to sell you this coverage. However, after the insured passes, the financial institution that issued you the insurance investigates your medical history.
This is one of the most primary differentiators of mortgage life, and often why it is not deemed as the best product to achieve the needs of the average homeowner who is simply looking to ensure their family is properly covered in case of tragedy.
With mortgage life insurance, after the primary insured has passed, the lender investigates the medical history and uses that information to determine if you should have qualified for that coverage in the first place. This evaluation is done despite having gone through the questionnaire at the outset of coverage and paying into the policy throughout the term. If a discrepancy exists, or if you did not answer a question to the best of your ability, you can be denied a payout leaving your estate with the responsibility of maintaining the mortgage protection. This is something most families would have trouble doing.
Life insurance products are superior in this manner as the coverage amounts that you are approved for and the premiums you pay are based upon your financial needs and underwriting that is done right at the onset to reduce the chance of a no payout situation.
It's also a good idea to make sure you've completed a will to make sure you've covered all your bases.
Life insurance always pays out the full face value
A mortgage protection product pays out the remaining balance of your mortgage. Your life insurance policy pays out the face value of your coverage, which remains constant.
As mentioned previously, payouts from a mortgage life insurance product payout to the bank, and while it may help alleviate the immediate financial needs of your family, it does not take into account the full picture of life for those you leave behind.
The bottom line
Picking the right policy can be a challenging process and there is a lot of information out there on why one mortgage protection or life insurance product is better than another. Sorting information is a difficult task. At Dundas Life, we see you as an individual and as such your family, financial and personal goals are what make you unique. Therefore, you should look for a product that fits you. Don’t hesitate to reach out with any questions you may have here.