Mortgage Insurance vs. Life Insurance
Which one better protects your mortgage?
Why do I need life insurance to protect my mortgage loan?
Let's look at this simply. The largest debt most of us take on in our lifetime is the mortgage loan.
But there's a chance you could get sick, be unable to work, or pass away before you finish paying it off. So ask yourself: could I make sure my family stays in their home if I got sick or died? If the answer is NO, then it's important to consider having the right protection.
Banks and insurance companies both offer protection for your mortgage loan — banks through mortgage insurance or mortgage-linked life insurance*, and insurance companies through term life insurance.
The best option for protecting your loan will always be term life insurance, where you own and control it. Let's look at some of the differences in this comparison table:
| Mortgage-linked life insurance | Term life insurance | |
|---|---|---|
| Eligibility process | Whether or not you're eligible to receive a claim payment is determined at the moment your beneficiary files the claim. That means you've been paying the premiums, but it won't be known until then whether you were actually covered. | Whether you're eligible is determined when you complete your application. Before your contract is issued and you start paying premiums, you'll answer detailed questions about your health, undergo medical evaluations, and know in advance whether or not you're covered. |
| Coverage | Since what you're protecting is the mortgage loan, your coverage decreases as you pay down your debt month by month, year by year. | No matter how much you owe on your mortgage loan, you keep the same coverage throughout the life of the contract. |
| Beneficiary | The lender is the beneficiary of your policy, and in the event of a fatality, hands the deed to the house to the survivor. | Since you own your contract, you decide who the beneficiary will be — someone who can use the money freely. |
| Premiums | You'll pay the same premium for a benefit that shrinks every day, because you owe less every day — right? | You'll pay the same premium for insurance that keeps your benefit stable for the agreed term. |
| Portability | Your insurance isn't portable — when your contract ends, the protection ends, and it's very likely that at renewal you'll switch lenders looking for a better rate. | Since it's an individual policy with no ties to the mortgage loan, you keep it for as long as you contracted it, even if you change financial institutions when you renew your mortgage. |
| Duration | Mortgage insurance lasts for the term of the mortgage contract, almost always 5 years. | You choose the protection period: 10, 15, 20, 25, and even 30 years. |
*These policies are offered by banks through insurance companies; they're products specifically designed to be easy for lenders to sell. They're group policies, and the coverage matches the exact balance of the debt, which decreases as you pay your mortgage month by month. The rates always stay the same, even as you owe less. Eligibility depends only on age, and there are no preferential rates for people in excellent health.