Have you ever wondered what the difference is? Term Life vs. Mortgage Insurance
You own a home and you have a mortgage. You are interested in getting insurance in place so that your mortgage can be paid off in case you pass away. You want your family to be able to either stay in your home or at least not have the burden of selling it and paying off the mortgage. You have two choices: mortgage insurance from your financial institution or term life insurance from an insurance company. What is the difference? Which one is better for you? There are differences between the two both in cost, coverage and payout. It is important to know the differences and make the correct choice for you. Insurance advisors do financial needs analysis for their clients and then present different options which are suitable. You can compare those with the mortgage insurance offered at a bank and you may be surprised.
First of all let’s describe the two products:
Mortgage insurance is typically sold by a bank that pays off your mortgage in the event of death. It only pays off your mortgage so if your mortgage decreases, so does the amount paid. The cost is usually added onto your monthly mortgage payments, which makes it simple. You may get asked some medical questions when you apply for your mortgage. They don’t do detailed health underwriting at time of application. They underwrite (have a look at your medical records/health) after you pass away. If you fail to remember something when you are applying, it can result in your claim being denied later, because underwriting happens after the claim is made. This can take some time. Plus you may get charged smoker rates even though you don’t smoke. Smoker rates are a lot more expensive. The beneficiary of the life insurance policy is the financial institution, not you. Your rates may not stay the same but may increase as you age. If you move you can’t take the insurance with you. It only pays off the mortgage which may have decreased over the years and any money left over goes to the bank.
Term Life Insurance
Term life insurance is bought directly from an insurance company and provides clients with a tax free lump-sum benefit to beneficiaries in the event of death. You can use this to cover your mortgage and use any left over money to pay off other debt or use to pay living expenses and replace lost salary. You can get term 10 or 20 which means you pay the same amount for that term for a set amount of insurance. The monthly premium stays the same for that term. Once the term is close to ending, you can reapply for another term, which may be different as your financial situation may have changed or you can choose to extend it or convert it. You are the beneficiary not the bank. Underwriting and medical questions are done when you apply so death benefits are paid quickly (usually within 2 to 3 weeks). Rates can be considerably lower if you are healthy and a non-smoker. If you move residences you can take the policy with you.
Let’s look at a few more differences in detail:
The cost of mortgage insurance from a financial institution can be a lot higher than when you get life insurance directly from a life insurance company. This is because they don’t really know your health. This monthly cost may also increase as you get older. Term life insurance is can be lower because they ask more medical questions and do all the underwriting before they approve you for life insurance. Over the course of a 20-year mortgage, the cost savings can be quite substantial. You have access to the best rates on term life insurance if you apply when you are younger and in good health. Term life insurance can be an attractive choice for financial reasons.
Who gets the money?
With mortgage insurance, the mortgage lender is the beneficiary, so the bank gets the money not you. They pay off the mortgage and can keep the rest if there is money left over after the mortgage is paid. With term life insurance, you choose who the beneficiary is. Your beneficiaries get the entire death benefit and pay off the mortgage and can you what they want with the extra money left over.
Is Payout Guaranteed?
For mortgage insurance from a financial institution, underwriting is done at time of death. That means they have a look at the application and your health etc after you have passed away and then determine if the death benefit will be paid.
What happens if you move?
When you get a term life insurance policy, it belongs to you. This means if you move you can take it with you even if you move or change mortgage lender. Mortgage insurance is tied to your mortgage and once you move or get a new mortgage that insurance coverage ends.
Is there a difference in payout amount?
With term life insurance, your payout remains the same. It never changes. Mortgage insurance coverage decreases over time as your mortgage amount gets smaller. What this means is that the payout with mortgage insurance would be less after several years than it was when you first purchased it even though you’re still paying the same premiums.
How long does the insurance last?
When your mortgage is paid off or you move to a different lender mortgage insurance ends Term life insurance can be extended or converted to another policy when your term is up. Your insurance advisor can explain your options to you.
The people selling you insurance at financial institutions have not been trained in insurance and do not know what is available in the market. They offer you only their products. It is important to consult with an insurance advisor that can correctly evaluate your needs and find the best product out there in the market for you.
Knowing the pros and cons of term life insurance or mortgage insurance can help you make the right choice on how you choose to protect you and your family. If you compare products you may be surprised and get better coverage for a lot less money. That can sure add up over 20 years.
Paula Buerger – Professional Financial Advisor PFA™ – email@example.com