Orlando Harmon
When it comes to protecting your mortgage, you have two main options: mortgage life insurance and term life insurance. Both can help your loved ones pay off your mortgage if you pass away, but they work in very different ways. Mortgage life insurance is typically cheaper than a life insurance policy because the payout decreases over time as you pay off your mortgage. On the other hand, term life insurance is more flexible and allows your beneficiaries to use the payout for anything, not just your mortgage. So, which is the better option for you and your family? Let's explore the pros and cons of each.
Which is cheaper: Term Insurance or Mortgage Life Insurance?
| Characteristics | Values |
|---|---|
| Purpose | Term insurance provides financial security for your family in the event of your death. It can be used to cover funeral costs, pay off mortgages or loans, or other expenses associated with an unexpected death. Mortgage life insurance, on the other hand, is specifically designed to pay off the outstanding balance of your mortgage when you die, ensuring your loved ones can keep the house. |
| Payout | Term insurance provides a lump-sum benefit to the beneficiaries, which can be used for various purposes like paying off debts, funeral expenses, etc. The amount of cover stays the same throughout the policy term. Mortgage life insurance, however, has a payout that decreases over time as you pay off your mortgage, resulting in a lower potential payout compared to term insurance. |
| Flexibility | Term insurance offers more flexibility as it is not tied to your mortgage. It can be extended or converted to another policy when the term ends. It also allows you to choose the beneficiary, giving them control over how the benefit is used. Mortgage life insurance, on the other hand, ends when the mortgage is paid off or you switch lenders, and the lender is the sole beneficiary. |
| Cost | Term insurance is generally considered the cheaper option due to its flexibility and the fact that it is not limited to paying off the mortgage. It is also cheaper because the cover amount remains constant, unlike mortgage life insurance, where the cover decreases over time. |
| Purchase | Term insurance is sold by insurance companies and can be purchased through a licensed insurance advisor or online. Mortgage life insurance is typically sold through banks and mortgage lenders, and the staff may not be licensed to sell this product. |
What You'll Learn
Term life insurance is more flexible
Term life insurance also offers more flexibility in terms of the beneficiary. With term life insurance, the policyholder can choose their beneficiary, whereas with mortgage life insurance, the mortgage lender is the sole beneficiary. This means that while the beneficiary of a term life insurance policy can use the payout for various expenses, the payout of a mortgage life insurance policy can only be used to pay off the mortgage. Additionally, the payout amount of a mortgage life insurance policy decreases over time as the mortgage amount gets smaller, resulting in a lower payout compared to a level term policy if the original cover amount was the same. In contrast, the benefit amount of a term life insurance policy stays the same and never changes.
Another advantage of term life insurance is that it can often be extended or converted to another policy when the term is up, providing continued coverage for the policyholder's beneficiaries. On the other hand, mortgage life insurance typically ends when the mortgage is paid off or the policyholder moves to a different lender, offering less flexibility. Term life insurance also offers the option of dealing with a licensed insurance advisor who is trained and certified, whereas mortgage life insurance is often purchased through a financial institution where staff may not have the same level of expertise.
While mortgage life insurance can provide peace of mind by ensuring that loved ones can stay in the family home, term life insurance offers more flexibility in terms of coverage, beneficiary selection, and portability. It allows policyholders to tailor their coverage to meet their specific needs and provides their beneficiaries with a lump-sum benefit that can be used for various expenses, not just paying off the mortgage. This flexibility makes term life insurance a more attractive choice for individuals and families seeking comprehensive financial protection.
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Term life insurance is cheaper
Term life insurance is generally a cheaper option than mortgage life insurance. It is a more flexible option, offering lower premiums and more control. With term life insurance, you can choose the beneficiary, who can then decide how the benefit is used, whether that be paying off the mortgage, covering debts, or paying living expenses.
Mortgage life insurance, on the other hand, is a policy that pays off the balance of your mortgage when you die. The benefit of this type of insurance is that it ensures your home is paid off if you die with an outstanding balance on the loan. However, the payout from mortgage life insurance decreases over time as you pay off your mortgage, while your premiums remain the same. This means that the potential payout is less than that of term life insurance, which stays the same.
Term life insurance is also more flexible in terms of who can purchase it. With mortgage life insurance, you may be denied coverage for medical reasons, whereas term life insurance can be purchased by anyone, with rates being more favourable for younger, healthier applicants.
Term life insurance is also portable, meaning that it remains in place even if you move, pay off your mortgage, or change your mortgage lender. In contrast, mortgage life insurance is tied to your home and mortgage and can only be used for that. If you sell your home, pay off your mortgage, or change lenders, your coverage ends.
Term life insurance can also be extended or converted to another policy when your term is up, whereas mortgage life insurance ends when your mortgage is paid off or you move to a different lender. This makes term life insurance a more attractive option for those who want long-term coverage that isn't tied to their mortgage.
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Mortgage life insurance is convenient
Mortgage life insurance is a convenient option for those seeking to protect their mortgage in the event of their death. Unlike term life insurance, mortgage life insurance is sold by financial institutions and can be purchased without a medical exam. This makes it an appealing choice for those who may have been denied term life insurance for medical reasons. The cost of mortgage life insurance is typically added to your monthly mortgage payments, making it a convenient option for those seeking to protect their mortgage.
Another advantage of mortgage life insurance is that it is specifically designed to pay off your mortgage in the event of your death. This means that your loved ones can stay in the family home without the burden of mortgage debt. While term life insurance offers more flexibility in how the payout is used, mortgage life insurance provides the peace of mind that comes with knowing your mortgage will be taken care of.
The convenience of mortgage life insurance also lies in its simplicity. It is a straightforward product that pays off your mortgage when you die. On the other hand, term life insurance can be more complex, with various options for terms and beneficiaries. For those seeking a simple solution to protect their mortgage, mortgage life insurance may be a better fit.
Additionally, mortgage life insurance is often sold by banks and mortgage lenders, making it easily accessible to those seeking to protect their mortgage. The staff at these institutions may not require a license to sell mortgage insurance, making the purchasing process more streamlined. However, it is important to note that the lack of licensing requirements may also be considered a drawback, as it could impact the level of expertise and advice provided.
Overall, mortgage life insurance offers convenience through its accessibility, simplified purchasing process, and specific focus on mortgage protection. While term life insurance may offer more flexibility and lower premiums, mortgage life insurance provides a straightforward solution for those seeking to ensure their mortgage is paid off in the event of their death.
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Term life insurance is portable
Term life insurance is a popular choice for many people due to its portability and flexibility. It is not tied to your home or mortgage and can be used for a variety of purposes, making it a versatile option. Here are some key points to illustrate the portability of term life insurance:
Portability across life changes
Term life insurance remains in place regardless of changes in your life circumstances, such as moving to a new house, paying off your mortgage, or switching mortgage lenders. This means that you can maintain continuous coverage without worrying about losing your policy's benefits. On the other hand, mortgage insurance is closely linked to your home loan and may not offer the same level of portability if you experience life changes.
Consistent benefit amount
With term life insurance, the benefit amount remains the same throughout the policy term. This means that your loved ones will receive a consistent payout, regardless of how long the policy has been in place. In contrast, the payout from mortgage life insurance decreases over time as your mortgage balance reduces, resulting in a lower benefit the longer you hold the policy.
Choice of beneficiary
Term life insurance allows you to choose your beneficiary, ensuring that the payout goes to the person or entity you designate. This can be a family member or anyone else you select. In contrast, mortgage life insurance typically names the mortgage lender as the sole beneficiary, and any payout goes directly to them rather than your chosen beneficiary.
Flexibility in usage
The payout from term life insurance can be used by your beneficiary in a variety of ways. It can be used to pay off the mortgage, cover debts, funeral expenses, living expenses, or any other financial needs they may have. This flexibility ensures that your beneficiary has the financial support they require to manage their expenses in the way that best suits their needs.
Portability across employers
Additionally, term life insurance is not tied to your employer. This means that if you change jobs or experience employment fluctuations, your insurance coverage remains intact. This is especially important in today's job market, where job security and permanence cannot always be guaranteed.
In summary, term life insurance is highly portable due to its detachment from specific circumstances, such as your home, mortgage, or employer. This portability, along with its flexibility and control in usage, makes it a popular choice for individuals and families seeking comprehensive financial protection.
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Term life insurance protects beneficiaries
Thirdly, term life insurance offers the policyholder more control as they can choose the beneficiary, whereas with mortgage life insurance, the lender is the sole beneficiary. This means that while the policyholder's loved ones benefit indirectly from mortgage life insurance as the mortgage debt is paid off, they do not receive the payout directly. Additionally, term life insurance can be tailored to match the length of time left on the mortgage, ensuring that the policyholder's family can pay off the remaining balance in the event of their death.
Finally, term life insurance is often a cheaper option than mortgage life insurance due to its flexibility and the fact that it is not tied to the decreasing mortgage debt. It can also be purchased at very affordable rates, especially if the policyholder is young and in good health when they apply. However, it is important to note that term life insurance may not be an option for those denied coverage for medical reasons, in which case mortgage life insurance could be considered. Overall, term life insurance provides valuable protection for beneficiaries by offering flexibility, control over the payout, affordability, and peace of mind.
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Frequently asked questions
Term insurance is a type of coverage that provides protection for a set period of time. It is generally the least expensive form of life insurance as premiums are based on your current age and health status. On the other hand, mortgage life insurance is a type of credit life insurance that pays off the balance of your mortgage when you die. The life insurance death benefit from an MPI policy typically decreases as you pay off your mortgage, while your premiums stay the same.
Term insurance offers flexibility and can provide funds for beneficiaries to balance mortgage payoff and other financial responsibilities. It is also portable, meaning it remains in place whether you move, pay off your mortgage, or change your mortgage lender.
Mortgage life insurance helps pay off your loan if you die during the length of your policy, so your loved ones can continue to live in the family home. It is also convenient as it can be purchased without a medical exam.
Term insurance is generally the cheaper option as it offers lower premiums and more flexibility. However, the best option for you will depend on your family's needs.
