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Mortgage Insurance vs. Life Insurance: What’s the Difference?

June 11, 2012

When you buy your first home you will probably hear a lot about mortgage insurance. The topic can be a little confusing. What is mortgage insurance, and do you need it if you already have life insurance? Should you purchase both, or just one? The concept of mortgage insurance is really relatively simple, and the answer to whether or not you need it depends on your current situation.

What is Mortgage Insurance?

Mortgage insurance is simply a term life policy that is designed to cover your mortgage if you die during the term. For example, if you have a 30-year mortgage you can purchase a 30-year term mortgage insurance policy that covers the amount owed on your mortgage, ensuring that family left behind will be able to pay off your home and continue to live there. This is helpful if you are the main breadwinner and your family would be unable to make the mortgage payments without you.

Some mortgage insurance policies are designed to have a decreasing death benefit over time. This means that the benefit decreases in accordance with your mortgage loan, so that it stays on par with what needs to be paid off as time goes by. The premium doesn’t change, because it has been averaged out over the life of the policy. These policies are generally on the cheaper side, but are less popular for the obvious reason that you get less money over time plus with some policies, you cannot use the money as you feel. You must pay off the mortgage which might not be the best solution as the time. A level term insurance policy is generally not much more expensive and keeps the same death benefit over time.

Term Life Insurance

There is really no difference between a term life insurance policy and a mortgage insurance policy. Mortgage insurance is a term life policy, simply one that is chosen to coincide with your mortgage. This means that you don’t have to buy something that is called mortgage insurance to cover your mortgage. You can simply carry a term life insurance policy with the value you need for the death benefit.

The bonus to this is that you can combine all of the coverage you need under one policy. There’s really no need to have two policies, one for the mortgage and one for your regular life insurance needs. The two can both be covered under a standard term life insurance policy.

If You Already Have Life Insurance

If you have already purchased a life insurance policy when you buy your first home, it’s important to take a look at how much coverage you have and how much the home purchase increases your coverage needs.

If the policy already in place is a whole or universal policy, it’s best to leave that one in force and look at added a term policy to protect the mortgage. You can carry these two policies at the same time, and the term policy will expire, leaving you with the whole life policy still in force for the duration of your life.

Adding a term life or mortgage insurance policy as an extra level of coverage ensures that your family has the extra money to pay off the mortgage and will still receive the death benefit from the other policy to assist with other needs. Later, when the house is paid off and you no longer need a policy to protect it, you can let the term policy expire and retain the other coverage as a death benefit for your family.

How Much Life Insurance Do You Need?

This is a question that many people find difficult. Can you have too much life insurance? Many would say no, but you can definitely have too little. Erring on the side of carrying more than is needed is certainly a better choice than not leaving enough to your family.

When it comes to choosing your coverage, take the time to use one of the many free life insurance needs calculators online, or sit down with an insurance professional to help determine your needs. You can then compare quotes on life insurance policies from multiple companies in order to find the most affordable way to obtain all of the coverage you require.

Mortgage insurance, under that particular title, is not necessarily what you need, but you should consider a good term life policy to protect the investment in your home and your family’s ability to stay there. Whatever name you give it, life insurance that covers the value of your mortgage is a good idea. Having life insurance that can do double duty is usually the most effective way to provide for your dependants.

  • Kaie Lucas

    I already have a mortgage. Is it too late to get mortgage insurance?

  • Nick – InsuranceHotline.com


    Typically, if you opt out of mortgage insurance at point of signing and then want to opt in later, you will not be able to “add on” mortgage insurance. Your mortgage loan/line of credit would likely have to be re-written with mortgage insurance included.

    An alternative to this, and sometimes a better option, is to get a life insurance quote for the amount of your mortgage.

    A mortgage insurance policy decreases in value as your mortgage declines. The premiums paid into a life insurance covers the amount you purchase which does not decline.

    To get a free life insurance quote, please visit http://www.insurancehotline.com/life-insurance-quotes

  • cheryl

    What happens with mortgage insurance after your house is paid for? What if you have just paid all that money and you didn’t have to use it ?

  • Nick – InsuranceHotline.com

    Hi Cheryl,

    Check with your lender. Mortgage insurance premiums in some cases are like a term life insurance policy. There is no cash value.

  • Frank

    Never buy Mortgage Life Insurance through your lender… here’s why:

    1) POST-CLAIM Underwriting – MOST of the time, you complete an application when you get your mortgage, and thats it. If one of the mortgagees passes, then the insurance company will “underwrite” you, and could decline your claim for anything as simple as not disclosing a “Diagnostic Test”, which could be an ECG, check-up or even a blood pressure test.
    2) Term Life Insurance is much cheaper if you don’t smoke and are in good health.
    3) Benefits are payable to your BENEFICIARY OF CHOICE, not the bank.
    4) Your Term Coverage is portable. Its attached to you, and not the mortgage. Therefore, you can switch lenders without worrying about your health deminishing.
    5) And finally, as mentioned above, the cost and benefit for a term policy is LEVEL. As for mortgage insurance, your coverage decreases and the cost stays the same…. NOT GOOD USE OF YOUR MONEY!!!

  • Cheryl

    I was offered critical illness insurance by the bank when I got my mortgage and they really pushed this. As a single person who has disability insurance through work, I don’t really see the necessity for this as I am currently in good health. To me, its like purchasing “accident insurance”, uh, no thanks. Any thoughts on this?

  • Nick – InsuranceHotline.com

    Hi Cheryl,

    Because every individual has their own needs, you would be best to discuss your specific needs with a licenced insurance professional. You can find one by visiting the Financial Services Commission website http://www.fsco.gov.on.ca.

  • InsuranceHotline

    Obtain a quote for a term life insurance policy. once you know that premium, check with your current mortgage insurance provider to see what, if any, cancellation penalty may apply. When you have that information you will be able to determine if it makes financial sense to cancel and get a term life policy.

  • D. M.

    Why let the insurance co. Make 12% and pay you 3 ? Invest in term, take the other money saved and you make the 12% from mutual funds.