Barry Choi: Mortgage Insurance vs. Life Insurance: Which is Better for You?

Mortgage and life insurance policies are optional, but a good idea if you have dependents

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If you’re buying a house, your lender will almost certainly try to sell you mortgage insurance. This type of insurance would eliminate the outstanding balance of your mortgage if you were to die. The last thing you want is for your loved ones to be responsible for a massive mortgage if you’re gone.

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While the concept of mortgage insurance is clearly advantageous, personal life insurance performs a similar function. The main difference is that life insurance is not linked to your mortgage, so it offers greater flexibility. Understanding the difference between two products can help you choose a font that’s right for you.

How Life Insurance Works

With life insurance, you receive a set amount based on your policy details. The payment can then be used for anything, such as paying off the mortgage, funeral expenses, and your children’s future education costs.

Generally speaking, many people will opt for term life insurance. This is where your life insurance policy is valid for a specific period. For example, 25 or 30 years old. Once that term expires, you won’t have a life insurance policy unless you buy a new one. Although this may not sound ideal, it can be very practical. Most people assume that their house will be paid off and their children will no longer depend on their income after the term is over.

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There are universal/whole life policies, but they cost a lot more than term life. These policies are only beneficial in a few specific circumstances, such as estate planning for high net worth individuals.

With personal life insurance, you choose the value of the policy. Typically, people will get enough insurance to cover their mortgage, unpaid debt, funeral expenses, and income replacement.

Buyers will also plan for future cash flow needs, such as their children’s post-secondary education costs. The more insurance you need, the higher your monthly premiums will be. That said, getting term insurance when you’re younger, like in your 20s, will cost less than waiting until you’re 30.

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Keep in mind that your medical history will also affect your insurance premiums. Smokers or anyone with a pre-existing condition should expect to pay more than a healthy person.

Flexibility must be taken into account

Your bank will provide your mortgage insurance. Although it may seem convenient, you will need to purchase a new insurance policy if you ever change banks, as your policy will not transfer.

Some people might assume they’ll never switch lenders, but it’s common for buyers to seek out the lowest rates when their mortgage comes up for renewal. If you make a change, getting new mortgage life insurance will likely cost more since you’ll be older.

With term life insurance, your policy isn’t affected by who you took out your mortgage with. Plus, life insurance allows your beneficiary to use the funds paid out for anything they want, not just to pay off the mortgage. The amount you are insured for will also not decrease over time.

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What mortgage and life insurance don’t cover

Some people are wrong mortgage life insurance with mortgage loan insurance, which is mandatory if you have a down payment of less than 20%. With mortgage loan insurance, sometimes called CMHC insurance, your lender is protected in the event of default. No payment would be made to you if you were to die.

Mortgage insurance and personal life insurance don’t cover you for serious illnesses, such as a heart attack or cancer diagnosis. They also do not provide you with any payment if you become disabled. That said, you can often buy policies to cover these scenarios at the same time when you buy mortgage or life insurance.

The cost of mortgage and life insurance

According to PolicyMe, an online life insurance provider, the average $500,000 20-year term life insurance policy for a 30-year-old male is $30.39. If you were the same age and took out a mortgage life insurance policy for the same amount, you would pay about $50 per month.

Since term life insurance is cheaper and more flexible, it will make more sense in most scenarios.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.



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