Comparing Mortgage Life Insurance and Personal Life Insurance
When you’re buying or renewing a mortgage, your lender or broker may offer you group insurance to protect your investment. Two types of insurance that can help in the event of death or illness are mortgage life insurance and personal life insurance.
Key Differences Between Mortgage and Personal Life Insurance:
- Mortgage life insurance only covers your mortgage balance, which decreases over time, while personal life insurance coverage typically stays the same.
- Mortgage life insurance coverage ends when your mortgage is paid off, while personal life insurance continues to provide protection.
- Mortgage life insurance is quicker and easier to arrange, while personal life insurance takes longer and involves a more in-depth medical examination.
The following c]chart below will help with a side-by-side comparison:
|Mortgage protection insurance through the lender||Life insurance through a life insurance company or financial advisor|
|Homeowner||Protects mortgage lender against debt||Protects homeowner’s mortgage debt|
|Beneficiary||Payout for mortgage lender||Payout for beneficiary|
|Evaluating medical evidence of your risk as the life-insured||Minimal questions||More questions, and for high coverage amounts ($500,00-$1million+) and older homeowners you may be asked to take health tests|
|Decision on assuming the risk and paying the claim||Underwritten at time of claim, so you may find out coverage isn’t available||Underwritten at time of application, so decision to provide coverage is made at outset|
|Amount of coverage||Drops as mortgage drops||Can stay the same or be reduced, at the policy owner’s discretion|
|Portability||Coverage applies to the same home under the same terms with the same lender||Coverage can be moved to cover any home and regardless of changes to mortgage lender or terms of repayment|
|Renewal of coverage||Need to renew coverage with each renewal period and change of lender. May need to prove reasonable, good health. Cost of coverage per dollar increases in accordance with rates at that time||Premiums remain the same for the length of the term. Renewal rates are guaranteed at the outset, and no further evidence of insurability is required if you keep the same policy|
|Use of coverage||Pays back the lender for the outstanding mortgage||Payouts for any purpose, including mortgage|
|Terms||Ends either when mortgage is paid off or when you switch lenders—whichever occurs first||Ends when you reach a certain age with term life insurance or the policy owners full lifetime with whole life insurance (term can be converted to whole coverage if desired)|
|Cost||2.8% to 4.0% of their mortgage amount||Significantly less than mortgage insurance. Approx. $500 a year, depending on the policy|
What is Mortgage Life Insurance?
Mortgage life insurance is specifically designed to pay off or pay down your mortgage if you pass away. It is available through your mortgage lender, typically requires minimal health-related questions, and has lower premiums because it’s a group insurance product. However, it’s only tied to your mortgage and will end when your home is paid off.
What is Personal Life Insurance?
Personal life insurance pays out a lump sum to your beneficiaries if you pass away. This money can be used for anything, including mortgage payments, and is not tied to any specific debt. It provides more flexibility to your beneficiaries, who can use the money to pay for expenses like tuition or other debts. Personal life insurance also has more flexibility, allowing you to adjust the policy to suit your changing needs, including significant life changes like having children.