Your need for life insurance with a mortgage
If you’re buying a home or renewing an existing mortgage, you may be offered group insurance by your lender or broker. You put a lot of money towards your home, so it’s worth taking steps now to protect your investment.
If you buy a house with a down payment of less than 20%, the lending institution requires you to get mortgage loan insurance to protect against the risk of default.
There are 2 ways to protect your home, with mortgage life insurance or personal life insurance.
What is mortgage life insurance?
Mortgage life insurance is coverage that you can purchase as a mortgage borrower. It’s designed to pay off or pay down the mortgage if you die. The insurance money payable under the coverage is always applied to the mortgage balance. This can help your family stay in their home, even if the primary income used to make the mortgage payments is no longer there.
Mortgage life insurance can be convenient to get at the bank when you’re arranging your mortgage. It may be easier to qualify for coverage than with personal life insurance. Mortgage life insurance also features an easy application process. Since mortgage life insurance is group insurance, this can result in lower premiums because the risk is spread out over a large group of people.
Mortgage life insurance is typically marketed towards new homeowners who may be concerned that an unexpected death or illness could leave their loved ones with a large mortgage.
A benefit of having mortgage life insurance as part of your overall financial plan is that it can free up money you may get from other insurance policies. For example, the money you get through insurance from employer benefits or a personal life insurance policy could go towards expenses other than the mortgage, such as utility bills or university tuition for children.
Mortgage life insurance usually carries a 30-day “free look” period when all premiums paid can be refunded if you cancel your coverage. This lets you buy coverage right away and have time to review the insurance certificate. It also allows you to talk with an advisor to determine what type of insurance may be best suited for your own financial situation.
How is personal life insurance different?
Personal life insurance pays money if you die while covered under the policy. With personal life insurance the person who owns the home typically owns the policy. Unlike mortgage life insurance benefits, this money can be used however your beneficiary or beneficiaries see fit.
For example, your family or other beneficiaries could use the proceeds to pay for post-secondary tuition, credit card debt, or other living expenses.
Personal life insurance can be purchased for a length of time unrelated to the amortization of your mortgage.
Your personal life insurance policy isn’t linked to your mortgage and won’t end because your mortgage is paid off, or you’ve moved it to another financial institution.
The amount of your mortgage life insurance is linked to the declining balance or your mortgage and will go down over time, while your personal life insurance coverage typically won’t decrease.
Personal life insurance can work for you today and also be flexible to your changing needs. You may be able to make significant adjustments to a personal life insurance policy without heavy fees. It’s possible your family’s financial situation will change as you have children (or they grow up), and personal life insurance can more easily handle these new financial realities.
Types of personal life insurance
There are 2 main types of personal life insurance – term life insurance and permanent life insurance.
Term life insurance is temporary coverage that provides the people or charities you name as beneficiary with a tax-free payout if you die within the term you choose. The payments you make, called premiums, are set for the term you choose and won’t change during that period.
Permanent life insurance is guaranteed, lifelong coverage that protects the people you care about. But it’s more than just insurance. Over time, your policy can build value you can access for cash during your life. Money withdrawn from the cash value in your policy is taxable.
You can access money in your policy through a loan or a withdrawal. And when you die, the people you’ve chosen receive a tax-free payment, similar to term life insurance.
Mortgage life insurance usually only requires answering a few health-related questions. Buying personal life insurance, on the other hand, typically takes longer and involves delving into your medical history.
Mortage life insurance only applies to the same home under the same terms with the same lender. Personal life insurance can be used to cover any home with any mortgage lender or repayment terms.
Mortgage life insurance cost 2.8% to 4% of the mortgage amount. Personal term life insurance usually costs less than mortgage insurance, depending on the policy.
Other insurance coverage to consider
You may also wish to consider critical illness insurance. If you’re diagnosed with a serious condition, it provides a one-time tax-free payment you can use for what you want, like paying off medical expenses, your mortgage and or debt. Your contract will define which conditions you’re covered for, but some examples include cancer, heart attack or stroke.