To say that life is full of choices would be no understatement. Whether you are looking for a new home, vehicle or job, the choices available to you can seem limitless. The same can be said about financial products, most notably insurance policies. Insurance providers offer an array of policies that offer coverage that can be tailor-made to align with your personal needs and budget.
When it comes to term life insurance policies, many people find themselves at an important fork in the road. They can either opt for a standard term life insurance policy obtained from a broker or provider or mortgage life insurance issued by a bank, mortgage broker or other lending institution. Both products have their advantages and disadvantages.
At Insurdinary, we believe in arming our readers with vital information to help make educated decisions about their financial futures. Read on to gain valuable insight into term life insurance and mortgage life insurance, their functions and their similarities and differences.
Term life insurance is generally the more popular choice for those seeking to purchase insurance for a set amount of time. The healthier and younger you are, the more affordable your premiums will be.
What Is Term Life Insurance?
The best way to present a comparison of two insurance products is by analyzing each of them individually. We begin with term life insurance, which is an insurance product that provides coverage for a predetermined amount of time. In most cases, this can be from as little 10 years to as many as 40, although this can differ based on the provider you are using. You lock in your premium upon the purchase of your policy and your coverage remains intact throughout the length of the term. When the term expires, you can either renew your policy at a higher premium or simply let it expire. Some term life insurance providers will allow you to convert your term life insurance plan to a permanent one; this usually happens up to five years before your coverage terminates.
With term life insurance, you have the power to choose the length of your term and the amount of coverage your beneficiaries will receive upon your death. Should you unexpectedly pass away while you are being covered, the insurance provider will pay out your coverage amount to your beneficiaries. This payment is known as the death benefit. It’s also important to note that in many cases a medical exam is not required in order to obtain a term life insurance policy.
When Should I Get Term Life Insurance?
As indicated by its name, term life insurance is designed for those who require life insurance temporarily. There are several situations in which a term life insurance policy may be your best option. For example, you might pursue it if you are considering retirement and require coverage only for the duration of your employment. You might also purchase term life insurance if you want to leave your beneficiaries with enough funds to pay off your mortgage if you have not already done so when you pass away. Finally, some people choose term life insurance for younger children to ensure they are taken care of in the event of accidental death.
What Are the Pros and Cons of Term Life Insurance?
PROS - Just like other types of insurance, there are pros and cons for term life insurance. Regarding the pros, term life insurance tends to be one of the most affordable insurance policies available on today’s market. You also have a great deal of flexibility with term life insurance, as you determine the length of your term and the value of your policy. If you need to cancel your coverage, you can do so before its expiry without any loss of value.
CONS - Your coverage ends when the policy reaches its expiry date, and when you reach that point, you will have three options. You can either renew your policy with your current provider, get a new policy from a different insurer, or convert your term life insurance into permanent life insurance coverage. As previously mentioned, some insurers will allow you to convert a term policy into a permanent one before your coverage expires.
Where Can I Get Term Life Insurance?
Term life insurance is available from most major insurance providers. You can also compare insurance quotes to get informed before you get insured. Our knowledgeable team of brokers can provide you with a wealth of information about your coverage options.
Mortgage Life Insurance
Very much as one would expect, should a mortgage life insurance policy be paid out, it goes directly to the mortgage lender. You have likely, or will be investing a significant amount of funds to your home so it's a sound decision to purchase this to protect the home you and your loved ones live in.
What Is Mortgage Life Insurance?
Sometimes referred to as mortgage protection insurance, mortgage life insurance acts as a form of credit protection. If you pass away unexpectedly or become disabled while you are covered, the policy will pay out the balance of your mortgage. However, unlike a life insurance policy, the mortgage life insurance payout goes directly to your mortgage lender instead of to your family or beneficiaries.
Why Do I Need Mortgage Life Insurance?
Many people purchase mortgage life insurance as a supplement to their individual life insurance coverage, as it helps to reduce the financial burden on their families upon their passing. The payout guarantees that your lender will receive a payment for the remaining balance on your mortgage, allowing your family to use the benefits obtained via your life or term life insurance policy to cover outstanding expenses.
What Are the Pros and Cons of Mortgage Life Insurance?
As mentioned above, mortgage insurance ensures your remaining mortgage balance is paid off so your family is not saddled with additional debt upon your passing. It is also relatively easy to get approval for mortgage protection insurance coverage, as there is no medical exam required. If, for some reason, your application for term life insurance is denied by a provider, you can apply for mortgage life insurance.
Having said that, it’s important to note that mortgage protection insurance policies tend to be more expensive due to higher premiums. In most cases, the premium will be much higher than that of a term life insurance policy. Secondly, although mortgage life insurance does provide a guaranteed payout, it decreases as you continue to pay off your mortgage. If you manage to pay off your mortgage balance before the expiration of the policy, your coverage will end.
Finally, the financial institution that provided your mortgage receives the payout instead of your family. This is somewhat of a double-edged sword, as the payout lessens your family’s financial burden, but at the same time, it leaves them with less money to cover other outstanding expenses. It should also be noted that while helpful, mortgage life insurance should not be viewed as a replacement or substitute for term life insurance.
What Happens If I Switch Lenders?
When your mortgage term expires, you have the option of renewing it with your current lender – they will inform you of the expiration of your term beforehand – or moving it to a different lender. Although you can transfer your mortgage, your mortgage protection insurance policy may not be able to follow you, so you may need to reapply when you sign on with the new lender. If you are considering switching lenders, be sure to speak to both lenders before to learn more about whether or not you can retain your mortgage protection insurance policy.
If you have a term life insurance policy, re-application is not required. However, you are free to make modifications to your coverage, such as increasing the length of your term or changing your coverage amount, if you wish.
Where Can I Get Mortgage Life Insurance?
Unlike other types of insurance, mortgage life insurance is usually available from banks and other mortgage lenders. If you are or will be applying for a mortgage in the near future, be sure to ask your lending institution or mortgage broker if they offer mortgage life insurance. They will provide you with further details.
In some cases, it may also be possible to obtain mortgage life insurance from a licensed insurance broker. Our experienced team of insurance brokers can also help you explore your coverage options. You can also compare insurance rates to learn more.
Comparing Term and Mortgage Life Insurance
In order to provide you with the insight you need to help make your decision, the table below outlines some of the key elements of both types of term insurance policies.
Term life insurance (Self-purchased)
Mortgage life insurance (Bank or lender-issued)
Power over your coverage
All applicable loans can be insured under one policy
You own your coverage and its associated contract
You can select your own beneficiary or beneficiaries
When your beneficiary or beneficiaries receive the death benefit, they can spend it in any way they choose
If you become disabled or critically ill, you receive the benefit and can use it as you see fit
You must obtain a policy for every loan you have with the institution
The financial institution effectively owns the policy and is its sole beneficiary
If you pass away unexpectedly, your loan and/or mortgage will be repaid by the lender
If you become disabled or critically ill, the lender receives the benefit and will use it to pay off your mortgage balance and/or loan(s)
Autonomy over your coverage
You decide the length of the term and the coverage amount
You are free to take out additional loans or refinance, if necessary
Your policy is convertible and can be upgraded to a permanent policy with no health exam required
You can choose between a set amount of coverage or a decreasing amount
Your coverage amount is equal to your current or remaining mortgage balance
The amount of coverage you receive decreases as you pay off your mortgage balance
If you take out a new loan or mortgage, you will require a new policy for each one
Mortgage life insurance is not included in lenders’ mortgage insurance (LMI)
Guarantees for your coverage
The premium you pay remains constant throughout your term, regardless of rising interest rates
The policy remains in effect throughout the duration of the term
- Your coverage remains intact, regardless of whether or not you switch lenders
Your coverage remains intact even if you pay off your mortgage
Your policy is underwritten before it is issued to you
Your policy keeps you covered in the event of 25 serious illness covered by your plan, and when you choose to take the extra benefit
Note: The number of illnesses covered by your policy may vary; contact your provider for more details
The premium you pay is subject to adjustment based on your age
Most bank or lender-issued policies provide coverage up to age 65
The disability premium varies based on interest rates
- If you switch lenders, your coverage ends immediately and you will have to obtain a new policy from your new lender
Your coverage ends if you pay off your mortgage
Your policy is underwritten at the time of claim
Note: This practice is illegal in some provinces
Your coverage may extend to three additional illnesses if you take the extra benefit
Note: The number of additional illnesses that can be covered is usually no more than three; contact your lender for more details
Assistance when you need it
You can get helpful advice and support from dedicated policy experts who examine your plan and current financial standing
Advice and support are available, but are limited only to mortgage life insurance and not any other financial necessities
By now, you’ve had some time to gain some insight into term life insurance and mortgage life insurance, how they function, and their pros and cons. Term life insurance is a relatively inexpensive option that is easy to acquire and apply for, has lower premiums, and provides your family with a guaranteed payout should you unexpectedly pass away. Mortgage life insurance names the lender that provides it as the sole beneficiary and ensures that your remaining mortgage balance is paid off to lighten your family’s financial burden.
Many personal finance experts agree that a term life insurance policy is the better choice of the two. The fact that you retain complete control over your coverage while you are insured is the deciding factor. You can make changes if needed and even cancel your plan without losing any value. The coverage ends when the term expires, after which you can renew it, switch to a different provider or upgrade to a permanent plan.
While mortgage life insurance pays off your mortgage, the issuing financial institution controls nearly every aspect of the policy. In addition, the premiums are higher and the amount of coverage decreases as you continue to pay off your principal. If you pay your principal off, switch mortgage lenders or reach age 65 while you are insured, the coverage abruptly ends.
Some may find that a bank-issued insurance policy works best for them, as leaving their families with outstanding mortgage payments creates more stress. The more budget-conscious may opt for a term plan from a major insurance provider to ensure their beneficiaries receive a death benefit if they suddenly pass away. But in the end, it’s up to you to choose the insurance product that aligns best with your personal budget and needs.