Mortgage Insurance VS. Life Insurance – What’s the Difference

Buying a home is an exciting time. When you make a decision to buy a home there are so many things to get organized; from moving plans, to mortgage financing, to insurance and more.

When you approach your bank or local mortgage broker to arrange your mortgage financing they will often offer you mortgage insurance. Not to be confused with CMHC mortgage insurance which protects your bank if you default, the insurance we are talking about deals with the insurance that will protect your spouse or loved one if you die.

Mortgage insurance, which is also referred to as mortgage protection is offered by many different companies in many different forms. Mortgage insurance is essentially life insurance; however your benefits will depend on where you obtain the mortgage insurance.

Mortgage insurance offered through a mortgage broker or bank often protects the mortgage lender. The mortgage lender is listed as the beneficiary on the policy, and the policy will provide that in the event you pass away whatever the balance of the mortgage you have with your bank will be paid off in full.

One issue with this is that when you obtain this type of policy the amount of your insurance payment remains the same as long as you have it but your mortgage balance will go down over time. This is one major reason why many folks opt to obtain a life insurance policy to protect their mortgage as opposed to this type of “creditor” mortgage insurance that protects the creditor.

If you obtain a term life insurance policy to protect your loved one in the event that something were to happen to you, the two main things that would differ from the above mentioned mortgage insurance is:

1.       Your loved one would be listed as the beneficiary, not the bank.

2.       The amount of insurance coverage you obtain would remain the same for the term of the policy.

Let’s explore the second benefit to buying life insurance to protect your mortgage a little bit closer. If you were purchasing a home and your mortgage was going to be $250,000 for example, so you purchased $250,000 in term life insurance coverage at a payment of $30 per/mo., in 10 years the coverage would still be $250,000. If something happened to you, your beneficiary would receive a payout in the amount of $250,000.

Had you purchased mortgage insurance from the bank that listed the bank as the beneficiary to pay off the mortgage in the event of death and started with a mortgage balance of $250,000, after 10 years if you passed away your mortgage balance may only be $180,000 and so the bank would receive $180,000.

This is why having a relationship with a good insurance broker is important. An insurance broker that works with all the insurance providers can review the different types of insurance available with you and help you make the best informed decision to protect you and your family.

For more information about mortgage insurance vs. life insurance please call IFCG at 416-849-1653 or visit www.wecoveryou.ca