There are a lot of good reasons to purchase term life insurance, as anyone with young children or other dependents knows. Term life insurance protects your family and loved ones if anything unexpected happens to you. But it’s not the first thing on new homeowners’ minds when thinking about protecting their new purchase. Maybe they should reconsider – namely term life insurance for mortgage protection.
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If you’re in the market for a new home, your lender is likely recommending that you purchase mortgage insurance. As life insurance professionals with years of experience helping people like yourself make informed insurance decisions, we have another recommendation, and that’s purchasing term life insurance for mortgage protection.
Life insurance vs mortgage insurance
Life insurance is supposed to provide a financial cushion for your loved ones when you die, especially if your death is premature or unexpected. Mortgage insurance pays off only your mortgage under similar circumstances. Rather than purchase mortgage insurance, which is designed only to pay off your home loan, consider buying term life insurance in the amount of your mortgage instead. Not only are costs generally lower, but you have more flexibility.
If you need more help understanding these terms, see our detailed notes here. If you are good with what these terms mean and want to quickly choose a better option, read on. The best way to determine whether term life insurance for mortgage protection is the better choice is by making a fair comparison.
Mortgage insurance premiums are usually higher than term life insurance premiums. In the case of mortgage insurance, there is no personalized risk assessment on your life. Therefore while the procedure for applying for mortgage insurance through your bank may appear simpler, it ends up increasing your cost of insurance. Much more work goes into the diligent underwriting of term life insurance, thus the insurance company knows more about the risk of covering you, and is able to give a more accurate and mostly lower price for term life insurance. That also means your benefit is guaranteed with mortgage protection through term life insurance – which is not the case with mortgage insurance.
That means if you sell your current home and buy a new one – or if you refinance your home through a different lender, or even if you renew your mortgage with your existing lender – you have to buy a new mortgage insurance policy. The mortgage insurance policy does not move or ‘port’ along with your mortgage. That’s a benefit only available with term life insurance, which stays with you for the length of the term, whether that’s 10, 20, 30 or some other combination of years.
As you pay down your mortgage debt, the amount of the mortgage insurance payout also goes down. Lower mortgage payout must mean lower premiums, you may think. Well that’s just not true – in the case of mortgage insurance, your premium stays the same, even as your coverage reduces. For example, with mortgage insurance, if you pass away when your mortgage has only a few years left until it is ended, the payout isn’t significant, while the premiums stay as high as they were when you obtained the insurance coverage.
OTOH, with term life insurance, the policy amount and premiums remain the same over the policy term. With mortgage protection through term life insurance, the payout would be the same whether it is year 4 or year 24 of your amortization period.
Term life insurance pays out to the beneficiaries of your choice, most likely your family. It serves to protect them when you are no longer around. Mortgage protection insurance isn’t really designed to protect your family. It’s designed to ensure the lender receives their money, and the fact that your family may benefit from paying off the mortgage is secondary.
While you own your life insurance policy, you don’t own the mortgage insurance policy and therefore the use of the proceeds from mortgage insurance are determined by the owner of the policy: the lender. If you should die unexpectedly, perhaps paying off the mortgage isn’t your spouse or children’s first priority. They have no choice with a mortgage insurance policy, but with a term life insurance policy, they can decide on the best use of the proceeds. That might mean using the money for a college education or paying off other debts.
As you can see, term life insurance holds significant advantages. The only minor downside to term life insurance in comparison with mortgage insurance is that the latter is a simpler procedure. When you close on your home, you can arrange for insurance that same day through your bank or lender with no medical exam. Term life insurance requires a bit more information (like your medical history) and effort, but with modern technology enabling many of the steps to be carried out on your tablet or phone, the process should go smoothly and relatively fast.
Interested in what protecting your mortgage through term life insurance might look like for you? Get in a free instant quote for mortgage protection with our online tools – you only have to answer a few basic questions to get a clear picture of how it might work for you and help build your protection plan. If you still have questions and want to learn more about mortgage insurance, check out detailed notes in our honest guide to mortgage insurance.