Life Insurance or Mortgage Insurance – Which Do I Need?

Purchasing a new home is a huge step in a relationship, in your personal life, and just generally. It’s a tremendous asset to have, one which likely dwarfs all the other assets you have obtained up until this point. If you are purchasing a new home, or even renewing an existing mortgage, odds are that you will be offered “group insurance” by your financial institution or even your broker. It’s important at this stage in life that you work towards protecting your investment, and taking the necessary steps to preserving your investment is worthwhile in the long-run.

Life insurance and mortgage insurance are both options designed to help protect your home and preserve your journey towards future financial goals. Life insurance, as a first example, is designed specifically to provide your beneficiaries (ex., your children, nieces/nephews, partner, even your parents) with financial reimbursement in the event of your passing. Mortgage insurance, on the other hand, is designed to protect new homeowners in the event they should pass from an accident or illness and leave behind a large mortgage to their loved ones.

Both types of insurance can protect you in the worst of situations, preventing you from leaving behind your debts as an inheritance. But which is best for your situation? Life, or mortgage? What about both? What’s the key difference between the two policies? In this article, we’ll take an in-depth look into the differences between mortgage insurance and life insurance and how they may benefit you.

What is mortgage insurance?

Very few Canadians are able to purchase their homes outright, especially in our current real estate market. Rather, they contribute what is known as a down payment – a percentage of the total purchase price of their home – and borrow the remaining amount. If the down payment you end up putting down ends up being less than 20% of the total purchase price, you will end up needing to acquire mortgage loan insurance. This can also be called just mortgage insurance or mortgage default insurance, and it is required by lenders because a reduced down payment implies that your mortgage is now for a higher ratio of your home’s value. Therefore, it’s higher risk.

Mortgage life insurance is also a variation of mortgage insurance that you can purchase as a borrower. In the event you should die due to an accident or illness while still paying off your mortgage, this insurance covers the remaining payments so that your loved ones aren’t saddled with the burden. The amount you need to pay for this insurance is typically linked with your mortgage balance. This can ensure your family will be able to stay in their home, even if the primary breadwinner (aka, you) is no longer able to continue generating the primary income.

What is life insurance?

Life insurance is designed to pay out a certain amount of money in the event you should pass while covered under your insurance policy. It can exist for a set number of years – like 10, 20, or 30 – or it can cover you for the entirety of your lifetime. Of course, the latter option is more expensive.

However, with life insurance, there’s more flexibility to how your beneficiaries can use the money they receive from the policy payout. Mortgage life insurance only offers coverage for mortgage payments.

Life insurance can be purchased ASAP where you are in life right now, and it can be transformed or altered to attend to your changing needs. There’s a lot of opportunity to convert or change life policies without tremendously heavy fees, and life insurance itself (or at least term life insurance) is relatively inexpensive. Everyone’s situation may change as they go through life. People will have children, purchase a family, add additional assets, etc. It’s important to have a policy flexible enough to “roll with the punches,” so to speak. Life insurance can handle altering financial realities.

What is the difference between mortgage life vs life insurance?

Mortgage life insurance is designed to cover the existing balance of your mortgage, and its costs will decrease as your mortgage is slowly paid off. On the other hand, life insurance has a locked-in rate that is unrelated to your mortgage.

Life insurance ends when the term is complete, or it lasts for the entirety of your lifetime. Mortgage life insurance is designed to end when your home is paid off. Mortgage life insurance is typically rather easy to purchase and is based on less factors, so it’s a quick, one-stop-shop purchase. Life insurance costs and coverage are variable and often dependent on you and your existing health, so it’s a longer purchase and requires more information before you can make a decision.

Life insurance is not tied to your mortgage, whereas mortgage insurance is. Mortgage insurance payouts are designed to cover your mortgage, and life insurance payouts can be used for mortgage payout – or for any other thing needed to maintain a standard of living after the insured’s passing.

Which should I have – mortgage or life?

Both have their own benefits, and there is some overlap between policies. But which do you need? Remember that life insurance offers you a death benefit which your beneficiaries receive, but they can choose to use that amount to pay off your mortgage, pay your funeral expenses, or other expenses that they depended upon you to pay.

Mortgage insurance will only provide you enough to cover the remaining balance of your mortgage. There will be no funds left over for any other expenses.

Ultimately, if you’re looking for greater flexibility, it is highly advised you choose a life insurance policy. The money goes to whoever you name your beneficiary, and it can be used to cover:

• Existing debts that you have
• Funeral costs
• The cost of childcare
• Other living expenses

That being said, if you have what’s known as a high-ratio mortgage, you will likely be required to purchase mortgage insurance, and in this case, you’ll have no choice. But, as your financial situation changes, keep life insurance in mind – and its variations! Some types of life insurance offer investment opportunities and build up a cash value with time. Talk to your trusted Excalibur Assurance broker for more information about life insurance, mortgage insurance, and your circumstances.