Mortgage Insurance vs. Term Life Insurance: Which is Best for Me?

Mortgage Insurance vs. Term Life Insurance: Which is Best for Me?

Throughout the mortgage process, one of the steps that you will have to decide on is whether or not you want insurance to cover your mortgage. If so, which type of insurance is best for you and your family. The two main types of insurance that you would be offered are mortgage insurance vs. term life insurance. Throughout this examination, we will explain each of these types of insurance. We will also provide pros and cons for each. This will help you to be educated on determining which of these two are best for you.

Mortgage Insurance (Creditor Insurance)

This type of life insurance is typically done through your lender and is tied to your mortgage. The premium will be included as a separate item from your mortgage. So you will not have to worry about it as it is withdrawn seamlessly. As the balance of your mortgage is repaid and begins to decline, so does your amount of coverage. This would be considered a con to this type of insurance. The premium never changes and unfortunately, it will continue to cover a declining balance. The amount of coverage obtained is determined by the amount of your mortgage, your age and your health. If you were to default on your mortgage payment, then your coverage would also cease as the two are connected.

Convenience

As a borrower, this policy is very convenient for you to obtain. Throughout the application process, you answer three to six basic health questions. This type of insurance is also a “group policy”, which means that all borrowers are placed in the same category. What this means is that there is no difference if you are applying with a health condition or if you are a smoker. This is compared to someone who does not smoke or have any sort of health conditions. This would be a pro for mortgage insurance vs. term life insurance.

What Happens If You Pass Away?

If one of the borrowers were to pass away during the course of the mortgage, the insurance company would cover the balance. The only beneficiary with this type of mortgage insurance vs. term life insurance is the lender. To clarify, this means that the insurance would pay the lender. It would not pay to the surviving family members should something happen to one of the applicants. For example, let’s say you had a mortgage that was a total of $350,000 and your current balance was down to $150,000.  When one of you passed away, that remaining $150,000 balance would be covered and paid through the insurance.

A con with this insurance is that payments can take several months to process before the borrower receives them as the insurer will need to go through the investigation process. In the event that the borrowers live throughout the course of their mortgage, the mortgage insurance vs. term life insurance will hold until the mortgage is paid off, or until the borrower turns 70 years of age.

Again, as this is tied to your mortgage, it is important to keep in mind that should you refinance, you may have to requalify for the higher amount of the mortgage. This could potentially increase your premium due to increased age and declining health.

Term Life Insurance

Term life insurance that is purchased by an individual or borrower that will pay their beneficiaries in the event of a death. It can be obtained only through a licensed insurance broker or agent.

Unlike Mortgage Insurance vs. Term Life Insurance, the application process for term life insurance is a lengthy process to acquire. In most cases, medical tests, such as an ECG, a saliva test and a blood test, would be required. The policyholder will need to complete a health questionnaire in the application process. This process will allow the insurer to determine whether or not they can offer coverage. If so, will base the premium on the individual as opposed to “grouping” like the mortgage life insurance.

Tell Me More

This type of insurance is called “term” life insurance as the insurance is valid for the given term, such as ten years. The amount of coverage remains constant throughout. This would be considered an advantage as you would receive the same amount of coverage throughout the entirety of your mortgage. For example, if you had a $1,000,000 life insurance policy, and one of you were to pass away, then that money would go to the beneficiary. It is worth noting, however, that when the policy comes up for renewal, the premium will likely increase as the policyholder’s age has increased. Another pro would be that with this type of insurance, you are independent of the lender.

Therefore, should you decide to switch lenders throughout your mortgage, your coverage would be unaffected. Additionally, if you were to miss a mortgage payment, your coverage would still be unaffected as long as you continue to pay your insurance premium.

What Happens If I Pass Away?

Upon death, the insurer will be responsible for paying the policyholder’s claim quickly. A couple of pros to this insurance is that payment is usually received within days following the death. The beneficiaries are named by you as the insured.

At Robert Floris’ Mortgage Architects office, we advise that Term Insurance is the better product with better value. Another option is to sign up for Mortgage Life Insurance through your broker.  Once you get approved for Term Life Insurance, cancel the Mortgage Life Insurance. It is easy to acquire and easy to cancel, which will cover you in that lapse of time in between. Food for thought.

With that said, regardless of which option you feel is best for you and your family, make sure that you definitely get some kind of insurance to protect your family. This is always a better option than going uninsured in these kinds of situations, in case the unimaginable were to happen.

As always, if you have any questions about which option would be better suited for you, do not hesitate to contact us at Robert Floris’ Mortgage Architects and we will be happy to help.

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

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