Home Know Your Money Life Insurance vs. Mortgage Insurance: A Comparative Analysis

Life Insurance vs. Mortgage Insurance: A Comparative Analysis

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Life Insurance and Mortgage Insurance are all optional. You are researching both of these Insurance policies, which means you are responsible for the future finance of yourself and your beloved ones. 

However, which policy should you choose? Life Insurance or Mortgage Insurance? What are they, and how are they different? Read on to learn more.

What is Life Insurance?

Life insurance is an agreement between an insurance company and an insured. The insurer guarantees to pay a sum of money to the designated beneficiary upon the death of an insured person or after a specific amount of time. The sum of money given by the insurer is called a death benefit, which is predetermined before you sign the insurance contract and is determined by the insurance policyholder.

There are two main types of life insurance policy

  • Term Life Insurance: 

+ There is only death benefit involved, no saving and investment benefit is expected.

+ The insurance contract is valid for a specific ‘term.’ It can be 10, 20, 30 years up to you.

  • Permanent Life Insurance: 

+ Besides death benefit, the insured can expect the saving and investment benefit, depending on the specific policy that he picks.

+ There are two popular policies: Whole and Universal Life Insurance.

What is Mortgage Insurance?

Mortgage Protection Insurance is an agreement between an insurance company and an insured, in which the insurer guarantees to pay a sum of money to the mortgage lender or the bank upon the death of an insured person or after a specific amount of time. The Mortgage Insurance is designed to cover your monthly mortgage debt if you pass away. We want to emphasize once again with this insurance policy, the money the insurance company pays out goes directly to your mortgage lender’s pocket. You have no right to choose the beneficiary.

Mortgage Insurance and Life Insurance Comparison

While Mortgage Insurance only covers your mortgage debt, Life insurance covers your mortgage cost and other financial costs.

While you have no choice to choose your beneficiary other from the bank or the mortgage lender, with a Life Insurance policy, you can decide on your beneficiary’s name (it can be one person or more than one pax). Also, you can change the beneficiary’s name over time as per the terms specified in the contract.

While the Life Insurance coverage is typically unchanged, the Mortgage Insurance decreases when your mortgage balance is less despite paying the same premiums.

The mortgage insurance is linked with the mortgage, while the life insurance policy is not. This means: When your mortgage is paid off, Mortgage life insurance coverage ends. But if you own a life insurance policy, you do not need to care whether your mortgage debt ends because the life insurance policy is not affected at all. The policy will continue to protect you and your family during the policy term or until you die.

A complicated (and sometimes) lengthy underwriting process, including a health check-up, is what you are typically required when buying any life insurance policy. When it comes to mortgage insurance, you are generally required to answer only a few simple questions about your health and situations; no health check-up is required.

Life Insurance vs. Mortgage Insurance: Which to choose

Choose Life insurance if:

– You are the breadwinner of your family

In the event of your death, Life insurance will help replace your income for a while. Therefore, your beloved family member can afford their daily expenses. If you have children, your kids can use the sum assured from the insurance company to cover their school/ university fees when you are not around. If you have the elderly to take care of, they can continue receiving the healthcare they deserve.

– You have special needs kids

Life Insurance will help your children have financial security at any time you – the parent is gone.

– You are not comfortably off, but you want to leave an inheritance for your family members.

If you are not too rich, do not worry! The payout from the Life Insurance you choose today can act as an inheritance to your loved ones. However, what distinguishes Life Insurance’s death benefit from normal inheritance is that Death benefit is tax-free, while inheritance can be taxed. 

So, fill in the name of your beneficiary carefully. The beneficiary is the lucky one to receive the ‘Life Insurance Inheritance’ from you.

– You are a business owner

Whether your business is big or small, Life Insurance will be an ideal backup solution for your family members if you die suddenly and may leave a business debt to your family (if your business is a family business).

The death benefit from Life Insurance will also work when you co-own a joint-stock company with a partner. Two people should participate in two life insurance contracts (it can be a business type purchased for key employees). If one person has an unfortunate situation, the living person can use the compensation money to buy the shares of the dead partner.

Choose Mortgage Insurance if:

– You are buying a home on installment payments or have an installment property

A mortgage insurance contract with a suitable level of protection as a home loan or property loan will prevent your family from selling the house and move away when you are no longer around with them.

– You have mortgage debt, and your health is not good enough for a health check-up from an insurer

In this case, you are likely to be denied any life insurance product. Mortgage insurance can be the last resort to protect your home financially.

How can you buy Mortgage Insurance and Life Insurance?

Check with your bank or mortgage lender if you would like to buy Mortgage Insurance.

Regarding Life Insurance, you can shop around many Life Insurance Companies or Insurance Brokers, like Insurance Direct Canada, to get the best rate!

Frequently Asked Questions

How do I get mortgage insurance? 

If you have a down payment coming that is between 5% to 20% less than the loan amount or the price of your home, then your lender will require mortgage insurance. This type of insurance plan is not usually something you need to shop for since only the lender can get it. You will pay for the coverage according to the lenders’ requirements, and they typically choose the insurance provider.

Can I be refused mortgage insurance? 

Unfortunately, this can happen to you as mortgage insurance companies have the right to consider the application and choose to accept or deny it.
We realize it is confusing to know that you are eligible to get a mortgage but not a mortgage insurance policy. In this situation, your lender might have to contact a different mortgage insurer, and you may even have to pay a higher down payment. The worst-case scenario is that the lender can decide not to provide you with a mortgage loan whatsoever.

What types of properties need mortgage insurance?

Should the lender require mortgage loan insurance, all sorts of housing need this. These properties include condos, duplexes, and traditional homes.
There are also some exceptions, such as investment properties and properties that are worth more than a million dollars. Investment properties are those in which the borrower will not reside, and they usually require a 20% down payment or more.
However, this all depends on your lender. The most important factors that the lender will consider when purchasing mortgage insurance are the down payment, risk level, and loan value. So please check with them first to find out their policies.

Who offers mortgage loan insurance policies?

In Canada, typically, the primary provider will be Canada Mortgage and Housing Corporation (CMHC), which is connected to the Canadian Government. But of course, it is still possible for you to get this kind of insurance coverage from private lenders such as Sagen/ Genworth or the Canada Guarantee Mortgage Insurance Company.

How can I reduce the cost of my mortgage insurance?

You are always required to pay a premium which is based on your down payment. The higher your down payment is, the lower your premium will be.
Therefore, the only way you can pay less for your mortgage insurance policy is to increase your down payment.
You can achieve this by looking for different financial sources. For instance, you get a non-refundable cash donation from your beloved ones.

Do I get any benefits as a first-time property buyer? 

There are some ways you can get financial support with your mortgage if you are buying property for the first time.
First, you can use the Home Buyer’s Plan to borrow money from the Registered Retirement Savings Plan (RRSP), which can increase your down payment.
Other than that, there are still Canadian governmental programs helping you afford your home, like the First-Time Home Buyer Incentive. This program gives a proportion of the property’s purchase cost to contribute to your down payment.

If I sell or purchase a new property, what will happen to my mortgage loan insurance? 

We understand that sometimes first-time buyers might want to invest in real estate, expand their family, or even relocate because of their new jobs. In this case, you might have no choice but to get new mortgages.
Luckily, most mortgage insurance companies do allow you to transfer your loan insurance to another property. But, again, consult your agent to find out if you are qualified for this. A lot of the time, as we have mentioned, your eligibility can depend on your circumstances with the loan amount, your down payment, and your current policy.

Does mortgage insurance decrease the amount of my down payment? 

Yes, indeed, this is one of the benefits of mortgage loan insurance as it helps you get a mortgage with a down payment of less than 20%.
It is undoubtedly difficult for many buyers to secure a 20% down payment or even more when purchasing their first home. However, mortgage insurance policies enable you to own your dream home more quickly while paying less down payment even after paying the premium.

Is mortgage loan insurance beneficial to the economy? 

It certainly is since this insurance plan stabilizes the national housing market by motivating people to purchase properties with lower down payments.
If everyone has to pay 20% or more down payments, it will be challenging for most to participate in the housing market, and home sales will be reduced significantly.
Mortgage insurance also benefits the lender and the mortgage insurer because they can both share the risk. You can get a reasonable interest rate from this as well. So basically, every party can benefit somewhat from this type of insurance policy which boosts the economy.

Are there any alternatives to mortgage insurance? 

You are in luck because there are other options for you if you find mortgage loan insurance undesirable.
Life, illness, and disability insurance is a type of coverage that can assist you with your mortgage payments or with the remaining costs you owe. Of course, as the name suggests, there are situations that you are qualified to apply for this plan:
– You lose your job
– You become critically ill
– You become severely injured or disabled
– And worst, you pass away
– Another alternative that you can check out is mortgage life insurance. This is a valuable product for you when you have beneficiaries keep the property after your death, but they cannot pay the same mortgage as before.

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