Life Insurance vs. Mortgage Insurance: Which Is Right for You?
If the Coronavirus pandemic has taught us anything, it’s the importance of ensuring your family is properly protected. One of the best ways to do this is through insurance.
In this article, we’ll review the two main insurance types: life insurance and mortgage life insurance. We’ll look at the main differences between the two products, the pros and cons, and when you might consider signing up for each product.
In This Article:
What is Life Insurance?
If you have dependents, you’ve probably considered signing up for life insurance. While we’d all like to think we’ll be healthy and live to be 100 years old, unfortunately, life can throw us curveballs. If you want to ensure your loved ones are taken care of, life insurance is a great way to do that.
Life insurance is a contract between you, the policyholder, and the insurance company. In exchange for paying regular insurance premiums, the insurance company promises to pay out a lump sum to your beneficiaries upon your death.
There are two main types of life insurance: term and whole life insurance. Term provides you with coverage for a specific period of time, usually between five and 30 years. Whole life provides you with coverage for your “whole life.”
It shouldn’t come as a surprise that the insurance premiums are almost always higher with whole life versus term. That’s because you’re being provided with coverage for a longer period of time.
What is Mortgage Life Insurance?
If you’re like most Canadians, your mortgage represents the single largest debt you’ll ever take on. Mortgage life insurance may seem like a good option and it can be, as long as you understand what you’re signing up for.
Mortgage life insurance, or mortgage protection, is a lot like term life insurance. If you were to prematurely pass away, become terminally ill, or get hurt in a serious accident, your mortgage would be paid off in full (usually up to a maximum amount).
The banks make it super simple to sign up for mortgage life insurance. In fact, the banks and mortgage brokers are required to offer it to you. If you don’t want mortgage life insurance, you need to sign a waiver. When you sign up for mortgage life insurance, the premiums are paid with your regular mortgage payments.
Unlike life insurance, you’re generally not required to do a medical exam when signing up for mortgage life insurance. Instead, you’re asked to fill in a medical questionnaire. It’s crucial that you answer the medical questionnaire accurately.
If you answer the medical questionnaire incorrectly and make a claim for mortgage life insurance later on, your bank could deny it. For example, your bank could deny the claim if it discovers that you have a pre-existing condition that you didn’t fully disclose on the medical questionnaire.
This is referred to as “post-claims underwriting.” Instead of the underwriting being done upfront like with life insurance, the underwriting is done later on once your loved ones file a claim for mortgage life insurance.
If you complete the medical questionnaire correctly your loved ones shouldn’t have any trouble receiving the payout. If you didn’t fill in the medical questionnaire accurately, a future claim could be denied. In that case, your beneficiaries would only receive the premiums you paid over the years instead of the large lump sum payout they were expecting.
Another potential downside of mortgage life insurance is that it provides less coverage over time. The more you pay off your mortgage, the less coverage you’ll receive. Referred to as declining coverage, your premiums remain the same but you’re receiving less coverage as time passes.
Let’s say your mortgage balance started out as $400,000. You’ll initially be covered for $400,000 with mortgage life insurance. If your mortgage balance is only $250,000 in five years, you’re only covered for that amount despite your premiums remaining the same.
That’s different from life insurance where if you took out a policy for $400,000, you’d continue to be covered for this amount as long as the policy is in effect.
You can get quotes for mortgage life insurance from a bank or mortgage broker or online on a website like PolicyAdvisor.com. PolicyAdvisor.com makes it simple to compare different prices and policies for mortgage life insurance, which they also call mortgage protection insurance, so that you can shop around for the best deal before settling on one provider.
What’s the Difference Between the Two
Mortgage life insurance helps you pay off your single biggest debt: your mortgage. Life insurance provides your beneficiaries with a lump sum that can be used as they see fit.
Losing a loved one early can be devastating. The lump-sum payout can be used to give your loved ones financial support during a difficult time. It can be used towards expenses like childcare costs, your child’s education, or to pay off any other debts (i.e. a car loan, credit card debt, etc.).
Of course, you can use some of your life insurance payout to cover your mortgage but you don’t have to.
The Pros and Cons of Each
- Your beneficiaries can use the payout as they see fit. It doesn’t have to be used towards the mortgage.
- Life insurance is flexible. You can buy term life insurance for however long you need the coverage (i.e. until your mortgage is paid off or your kids grow up).
- The underwriting is done upfront, so there’s less chance of your claim being denied later on.
- You’ll usually need to undergo a medical exam in order to be covered, which takes time.
- The premiums may be more than mortgage life insurance. (Although you may want to look into term life insurance over a whole life, as the premiums tend to be more affordable.)
Mortgage Life Insurance
- There’s no medical exam upfront. All you have to do is complete a medical questionnaire.
- The premiums tend to be more affordable than life insurance. This helps first-time homebuyers who may already be pretty strapped for cash.
- Life insurance takes time to set up. Mortgage life insurance provides you with immediate coverage. This ensures you’re protected until you sign up for life insurance.
- Post-claims underwriting means that you may believe that you’re covered, only for your loved ones to find out that you aren’t because you didn’t complete the medical questionnaire correctly.
- Mortgage life insurance provides declining coverage. As you pay down your mortgage over time you’ll get less of a benefit.
What Factors Affect the Cost of Life Insurance?
Have you ever wondered why your life insurance policy has higher premiums than your partner’s? If you want to save money on your life insurance policy, it’s important to be aware of the different factors that can affect the cost.
- Your Age – The younger you are, the lower your insurance premiums will be.
- Your Gender – Women on average live longer than men, which means that they typically pay lower insurance premiums.
- Your Medical History – If you have a history of medical issues, that could result in higher insurance premiums. If your family has a history of health issues like cancer or diabetes, this can also result in higher premiums.
- Your Current Health – In order to get coverage, you’ll need to fill out a health questionnaire or go through a medical exam. If any health issues come up, that could mean your premiums will be higher than the average person. For example, if you’re overweight, you may be required to pay higher premiums.
- Your Occupation – What you do for a living can have an impact on the insurance premiums you pay. For example, if you work at a job that’s naturally dangerous like being a firefighter, you’ll likely have to pay higher premiums and there may some extra policy exclusions (things not covered).
- Smoking – All things considered equal, someone who’s a smoker will almost always pay higher premiums than someone who isn’t. The good news is if you’re able to quit, you typically qualify for lower premiums only after a year. Just one of the many good reasons to quit smoking.
- Recreation – What you enjoy doing in your free time can also impact your insurance premiums. For example, if you enjoy rock climbing or sky diving, you may have higher premiums if you do these activities regularly.
- Your Choice of Policy – While all the factors above matter, so does your choice of policy. For example, with term insurance, the shorter the term that you choose, the lower the premiums will be. Likewise, the more coverage you choose, the higher the premiums will be. You’ll want an insurance policy that provides you with enough coverage that you can afford.
To compare pricing, it helps to go through a real-life example. Let’s say I’m looking for $400,000 worth of term life insurance coverage for 20 years. I ran a quote through PolicyMe. I was provided with quotes starting at around $20 per month.
I ran the same quote for mortgage life insurance. I used a mortgage balance of $400,000 and a 20-year mortgage amortization. I was provided with a quote of about $45 per month.
|Life Insurance||Mortgage Life Insurance|
|Insurance Term||20 years||20 years|
|Total Paid After 20 Years||$8,400||$10,800|
I’d encourage you to shop around and read the fine print because the cost of coverage between policies may differ a lot. For example, with PolicyMe the lowest quote I received was $35 per month, but the highest was $70 per month. That’s a big difference. That’s why it pays to comparison shop.
Note: the premiums you pay will be different based on your own personal circumstances.
When You Might Consider Signing up for Either
If you have substantial savings and you don’t have much debt outside your mortgage, you might consider signing up for mortgage life insurance. Likewise, when you don’t have any insurance coverage or you can’t afford life insurance right now, you might opt for mortgage life insurance.
If you can afford the premiums, that’s when life insurance makes a lot of sense. Whether you sign up for term or whole life, your beneficiaries have the flexibility to use any payout as they see fit.