Mortgage Insurance vs Life Insurance

You picked a house that was the perfect match for your needs.  Selecting insurance for your home should be no different.

When it comes to home insurance there are two types.  One that covers the lender and one that covers you.  Here’s the difference:

Mortgage Insurance

Mortgage insurance pays the balance of your mortgage to the bank if one of the people listed on the mortgage passes away.  The loan will be completely paid off so this liability is not left to your family.  This option is readily available and conveniently added to your regular mortgage payment.  You are most often approved for this insurance by filling out a simple questionnaire, which includes basic health questions.

This convenience comes at a cost.  The most important thing to remember is that, even though you are paying the premiums, you are not necessarily guaranteed you will be covered in the event of a claim.  These types of policies use post-claim underwriting.  If you have a health condition, whether you are aware of it or not, at the time of signing papers and it is not disclosed, your claim will most likely be denied.

Term Life Insurance

Term Life insurance typically requires a more detailed screening process, which can include blood and urine samples and information from your doctor.  Depending on age, gender, smoking status and overall health, premiums can vary when compared to mortgage insurance, however generally it tends to be more affordable.

Once your coverage has been confirmed, you own the policy and can name whoever you choose as the beneficiary.  Only you can cancel or make changes to the policy, as long as you keep up premiums.  Your coverage does not decrease.  Your coverage will remain in force even after the mortgage is paid off.

Term insurance is portable, it is attached to you rather than your debt.  You can also personalise your coverage by selecting from various available options.

Key Differences

Most Canadians renew their mortgage every 5-10 years depending on term.  You will need to renew your mortgage insurance at this time and may have to pay higher premiums.

Mortgage insurance benefits only pay the outstanding amount owing on your mortgage which declines as you pay down your debt.  Only the lender can receive the benefit from the insurance.

Term life insurance is insurance for a specified time, for example 10, 15 or 20 years.  The benefit does not decrease over the term.  Your family can decide what to do with the payout.  In today’s world there are many financial obligations to consider and having the flexibility to choose offers peace of mind.

This column is written by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments.  Please contact your own advisor for specific advice about your situation.