A tale of two policies
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
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?
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.
This leads us to the 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
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 currently 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
Where should I get my insurance coverage from?
As previously stated, you have the power to choose where you get your insurance policy from. If you are looking for a term life insurance policy, you can get it from most licensed insurance brokers or directly from a representative of a major insurance provider. If you are applying for a mortgage, you can obtain mortgage protection insurance directly from your bank, mortgage broker, or other lending institution. However, there is a case to be made as to which option is better.
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.
|Features||Term life insurance
|Mortgage life insurance
(Bank or lender-issued)
|Power over your coverage||
|Autonomy over your coverage||
|Guarantees for your coverage||
|Assistance when you need it||
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.