Whether you're buying a home for the first time, or refinancing an existing mortgage, someone has probably suggested you purchase mortgage life insurance. But don't rush into buying a policy until you've looked at all the possibilities. You could end up saving money and getting added life insurance coverage at the same time by purchasing a term life insurance policy instead.
What is mortgage life insurance?
Mortgage life insurance, also known as mortgage insurance or creditor insurance, is offered by most banks and lending institutions. It is a life insurance policy that pays the balance of your mortgage to the lending institution if a person listed on the mortgage passes away.
How does term life insurance cover your mortgage?
When you purchase a term life insurance policy, you take into account all the money your family will need in case you are not around to help out. This includes your mortgage payments.
Mortgage life insurance vs. term life insurance
Depending on your age and health, the premiums on mortgage life insurance can be much higher than what you would pay for a term life insurance policy. Take a look at these comparisons for $250,000 coverage:
Approximate Rate Comparison:
For a couple aged |
Monthly bank mortgage insurance premiums* |
Term 10 monthly life rates** |
30 |
$36.00 |
$24.53 |
35 |
$52.00 |
$28.13 |
40 |
$80.00 |
$36.00 |
45 |
$116.00 |
$49.95 |
50 |
$160.00 |
$73.35 |
* Based on the information available in March 2008 from the websites of two major Canadian banks.
**Based on the best rates available for joint coverage (male and female non-smokers) in March 2008, using the Kanetix® Term Life Insurance quote comparison service. Original rates are shown in annual premiums. For comparison purposes we have shown these annual rates as their monthly equivalent.
What do all these numbers mean?
Well, these numbers suggest that a couple buying a home can get a better life insurance rate if you chose a term life insurance policy over a mortgage life insurance policy from your lender. While getting mortgage insurance through your lender is convenient, a term life insurance policy might be the way to go if you're looking to save money.
Extra coverage with term life insurance
A term life insurance policy gives you added coverage and flexibility over a mortgage life insurance policy;
The beneficiary of a mortgage insurance policy is the bank, whereas your family receives any payout from your term life policy directly. This gives them the flexibility of using the money to pay off debts, or, if they can still carry the mortgage payments, they can use it for investing and securing a future income.
Mortgage insurance policies only cover you for the amount of your mortgage you owe to the bank. As you pay down your mortgage, your coverage amount decreases with it. This is called a reducing balance. With a term life insurance policy, you have a constant level of coverage for the whole term and are getting better value for your monthly payments.