Life Or Mortgage Insurance: Which Offers Better Protection?

Life insurance and mortgage insurance are two different types of insurance that can protect your home in the event of your death. While both types of insurance can be used for mortgage protection, there are key differences between the two. This article will explore the pros and cons of each type of insurance, so you can decide which one is right for you.

Life insurance can cover more than just the mortgage

Mortgage life insurance is a type of insurance that is in effect for a specific period of time, usually the amount of time remaining to pay off the mortgage loan. However, this is not the case with life insurance, which can be in effect for a much longer period of time, sometimes even for the whole of your life.

Mortgage life insurance is designed with one specific goal in mind: to pay off the remaining balance on your home loan in the event of your death. The beneficiary of a mortgage life insurance policy is usually the mortgage lender, but some policies allow you to select a beneficiary other than the mortgage company, such as your spouse.

On the other hand, life insurance policies, like term life insurance, come with a death benefit. This is the money that goes to your beneficiaries after you die. The exact amount they will receive depends on the policy you buy. With term life insurance, you are covered for a set period, such as 10, 15, 20 or 30 years. The premium, or the monthly or annual fee you pay for insurance, is usually low for the first term. If you die while you are covered by your life insurance policy, your beneficiaries will receive a tax-free death benefit. They can use this money to help pay off the mortgage or for any other reason they choose. So, not only is your mortgage protected, but your family will also have funds to cover other expenses that they relied on you to pay.

Mortgage life insurance is typically offered by banks and lenders during the mortgage application process. This type of insurance can also be purchased through independent sources such as traditional insurance providers.

Pros and cons of mortgage life insurance

Mortgage life insurance can be a good option for some because it is easier to get approved. There is minimal underwriting versus term life insurance, which means it's much less likely you will be turned down or penalised with a higher premium due to issues such as health or occupation. This might be a better option for someone in poor health or who has other issues that might create problems in getting approved for term life insurance.

However, mortgage life insurance has its drawbacks. The insurance payout goes directly to the lender to pay down the loan. Your loved ones still receive a benefit in that the home will be paid for, but no money goes to them directly. Also, the cost per dollar of coverage is high and increases as the death benefit drops. Plus, beneficiaries can't use the payout for anything else.

Life insurance offers more flexibility

Life insurance policies, like term life insurance, come with a death benefit. This is the money that goes to your beneficiaries after you die. The exact amount they will receive depends on the policy you buy. With term life insurance, you are covered for a set period, such as 10, 15, 20 or 30 years. The premium, which is the monthly or annual fee you pay for insurance, is usually low for the first term.

If you die while covered by your life insurance policy, your beneficiaries will receive a tax-free death benefit. They can use this money to help pay off the mortgage or for any other reason they choose. So, not only is your mortgage protected, but your family will also have funds to cover other expenses.

With life insurance, you get to choose how much insurance coverage you want and for how long you need it. The coverage doesn't decline unless you want it to. You can also choose who your beneficiaries are, and the money will go directly to them, not the bank or lender. This means that your beneficiaries can use the money for any purpose, such as paying off other debts or covering the cost of childcare.

Life insurance policies also have the added benefit of being portable. This means that even if you renegotiate or transfer your mortgage to another company, your policy stays with you. You don't need to re-apply or prove your health is good enough to be insured. This is not the case with mortgage insurance, where your policy doesn't automatically move with you if you change mortgage providers.

Life insurance is also a good option if you want to provide financial protection for your family that doesn't lessen over time. With mortgage insurance, the payout decreases as you pay down your mortgage, and you have to continue paying the same premiums for this decrease in coverage. Eventually, your policy ends if you pay off your mortgage before you die, and there is no death benefit for the premiums paid.

Mortgage insurance is cheaper

Mortgage life insurance is generally cheaper than level term life insurance. With level term insurance, the premiums remain consistent throughout the policy, whereas with mortgage cover, premiums can decrease over time as your mortgage lowers. This is why mortgage life insurance is often referred to as decreasing term life insurance.

The decreasing term is one of the cheaper options as the payout is lowered by a predetermined amount each year. This might be a better option if you have other debts that also reduce over time, such as student loans or household bills.

Decreasing term insurance is also considered less risky for insurers, as there is a lower chance of having to pay out during the policy's length. This is another reason why premiums are a lot cheaper compared to other types of insurance.

Mortgage life insurance is a good option if you have a repayment mortgage. However, it may not be suitable for everyone, even if it is cheaper than level term insurance. If your spouse or children can cover other expenses in the event of your death, you may not need it. It is always best to seek advice on which plan suits your needs.

Mortgage life insurance is also a good option if you can't afford term insurance or have poor health, making the cost of term life insurance unrealistic.

Life insurance policies are more personalised

Life insurance policies are more flexible and can be tailored to your needs. You can choose the amount of cover you need and the number of years you need it for. It can be taken out in joint or single names. For example, if you have a mortgage and other financial obligations, you can use the money from a life insurance policy to cover both.

With life insurance, you get to choose your beneficiaries, who can use the money for any purpose. This means that your beneficiaries can use the money to pay off the mortgage and cover other expenses. In contrast, mortgage insurance only covers the outstanding mortgage balance, and the death benefit goes directly to the bank or lender.

Life insurance policies are also more portable. If you change mortgage providers, your life insurance policy stays with you, and you don't need to re-apply or prove your health status. On the other hand, mortgage insurance policies don't automatically move with you, and you may have to prove your health is still good if you change providers.

Life insurance policies can also be more cost-effective in the long run. While mortgage insurance premiums remain the same, the benefit decreases as you pay down your mortgage. With life insurance, the amount of cover you choose stays the same throughout the policy term, and your beneficiaries will receive the full value of the benefit.

Life insurance policies also offer more flexibility in terms of customisation. Riders are add-on coverages that allow you to customise your policy. For example, a waiver of premium rider can help cover your premiums if you become disabled and unable to work.

Lastly, life insurance policies can be more accessible to those with health issues. Mortgage insurance policies may not require a medical exam, making them more accessible to those with health issues. However, life insurance policies offer guaranteed coverage regardless of health status, and the rigorous underwriting process ensures that you won't be penalised with higher premiums due to health issues.

Life insurance is more suitable for those in good health

The benefits of life insurance for those in good health

Life insurance is a good option for those in good health as it provides more flexibility and broader coverage than mortgage insurance. Here are some reasons why life insurance may be more suitable for those in good health:

• Flexible coverage: Life insurance allows you to choose the amount of coverage you want and how long you need it for. It can be used to cover a range of financial obligations, such as mortgage payments, large debts, child care, and health care expenses.
• Beneficiaries have flexibility: With life insurance, your beneficiaries have the flexibility to use the death benefit for any purpose, including paying off the mortgage and covering other expenses. This gives them more control over the funds and ensures they can use the money in the way that best suits their needs.
• No decrease in coverage: Unlike mortgage insurance, life insurance coverage does not decrease over time as you pay down your mortgage. The amount of coverage you choose remains constant as long as premiums are paid, providing ongoing financial protection for your loved ones.
• Portability: Life insurance policies typically stay with you even if you change your mortgage provider or renegotiate your mortgage terms. You don't need to re-apply or prove your health status again, making it a more stable option.
• Lower cost for good health: Life insurance premiums take into account various factors, including age, health, smoking status, and occupation. If you are in good health, you may be able to secure lower premiums, making life insurance a more cost-effective option.
• No medical exam required: While some life insurance policies may require a medical exam, there are also options for no-medical-exam life insurance policies. This can be beneficial for those in good health who want to avoid the hassle and cost of a medical exam.

While life insurance offers several advantages for those in good health, there are situations where mortgage insurance could be a more suitable option:

• Health issues: If you have pre-existing health conditions or other health issues that make it difficult to qualify for life insurance, mortgage insurance could be an alternative as it typically does not require a medical exam.
• Cost concerns: Mortgage insurance may be cheaper in the short term, especially if you are in poor health and face high life insurance premiums. However, it is important to consider the long-term costs, as mortgage insurance premiums may remain the same even as the death benefit decreases over time.
• Simplicity: Mortgage insurance is designed specifically to cover your mortgage payments, making it a simpler option if you only want protection for your mortgage and do not want to worry about managing additional funds.

Frequently asked questions