Mortgage Insurance or Life Insurance?

Mortgage Insurance or Life Insurance?

I have been fortunate enough to engage with people in the insurance industry to know that you have options when it comes to insuring your home against the possibility of death and your mortgage may still left outstanding.

Here in Canada, there are two ways to insuring a mortgage: you can tie your insurance premiums to your mortgage in the form of mortgage insurance, or you can purchase personal life insurance to cover this most unfortunate tragedy. But which way is better? I say go the route of personal life insurance, if you qualify.

Here is a comparison of the two:

#1) Paying premiums to protect the mortgage through mortgage insurance:

You pay a premium every month for mortgage insurance, which is usually built right into the mortgage payments. If you die, the insurance pays out the principal of the mortgage. Of course, we know that every payment you make reduces the principal on the mortgage, therefore it costs the mortgage company less to pay out a mortgage in the case of death every month you successfully make a payment to reduce its principal. Plus, the premiums you pay on the mortgage never decrease, so in fact you receive less value on the premiums every month!

For example:

You pay $45 a month of insurance on a $200,000 mortgage today. Ten years from now you suffer an unfortunate death. The mortgage has been reduced to $120,000 in this time. Furthermore, the beneficiary of the mortgage insurance is the mortgage company. The mortgage insurance company has had you pay that $45 per month the whole time and they just saved themselves $80,000 in payouts because you worked so hard to have that mortgage paid down.

#2) Paying premiums to protect the mortgage through personal life insurance:

If you have a personal life insurance policy on the value of the house instead, you still pay monthly premiums on the life insurance, but in the case of death, the entire policy amount will be paid out to the beneficiary of your choice.

Here is an example using the same scenario as above:

You get a $200,000 personal life insurance policy and the premiums are the same $45 per month. Ten years from now you suffer an unfortunate death. The mortgage has been reduced to $120,000 in this time. The life insurance company who has had you pay that $45 per month will pay out the entire $200,000 policy to the beneficiary you listed, not the mortgage company. Your beneficiary has now the option to pay off the $120,000 mortgage and the remaining $80,000 will go to either your estate or to your beneficiaries.

Here is a suggestion from one of my insurance colleagues: take the mortgage insurance while the personal insurance company is in underwriting, then you can cancel it once the personal insurance is approved. This way if something shows up in your personal application you still qualify for your mortgage insurance and can maintain the terms of your mortgage. There are more advantages to having a personal policy vs. a mortgage insurance policy, I just wanted to point out the cash and beneficiary advantage of using personal life insurance. Check with your life insurance agent about what options you may have when it comes to using personal life insurance to protect your home and family.

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