Mortgage Insurance vs. Life Insurance: Be Aware!

It’s true that when buying a home or refinancing an existing mortgage, many people are tempted by the utter convenience of mortgage insurance.  After all, it’s offered right through the lending institution and it ensures that your mortgage is paid off directly should you pass away.  But before you sign up for a policy, it’s definitely worth doing a bit of research into the benefits of life insurance and how they stack up against the benefits of mortgage insurance.

The Underwriting
By far one of the most common concerns about mortgage insurance is the underwriting procedure.  With life insurance, the underwriting is done at the time the policy is issued, which means that as long as you’re paying your premiums, you’re covered.  With mortgage insurance the underwriting is not done until the time of death, at which time the bank reserves the right to review the policy and decide whether or not they want to honor it.

So for example, if the bank determines that you had a pre-existing medical condition and they decide not to insure you after all, your family is out of luck.  Oh, they’ll get your premiums back, which is only fair considering that you’ve been paying for insurance you never really had, but it’s highly unlikely that some refunded premiums are going to equal the amount you thought you were actually insured for.

Discounts on Premiums
Whereas many life insurance policies may offer discounts on premiums if you are a healthy individual with a healthy family background, mortgage insurance unfortunately does not.  These discounts can result in some serious savings, especially for older people. 

Level Premiums
There are many types of life insurance that offer level premiums rather than premiums that rise as you age.  With mortgage insurance the premiums are not level, and they will go up as you get older.

Full Control
With a life insurance policy you are the policy owner and therefore you are the one in control, while mortgage insurance is coverage under a group policy owned by the lending institution, meaning you have no control. 

Cancellation
With mortgage insurance, the lender reserves the right to cancel the policy; however with life insurance you are the only party who is able to cancel the policy.  Another important consideration is that the policy becomes void if your mortgage is in default or if you move your financing to another institution, although with life insurance your policy remains intact regardless of the status of your financing. 

Convertible
Life insurance is fully convertible while mortgage insurance is not. 

Guaranteed Renewal
While Term life insurance is automatically renewable, with mortgage insurance you may get to your mortgage renewal date to find that your mortgage insurance is not being renewed after all.

Flexibility
While mortgage insurance the bank is the beneficiary, which means that upon your death your policy pays out the balance of your mortgage directly should you meet an untimely death, with term insurance the death benefit is paid to your family so they can choose where the money is best spent, for example if your spouse is able to carry the mortgage comfortably they may opt to invest the money, and with life insurance they have that option.

And another important factor to keep in mind about mortgage insurance is that it operates as a reducing balance, meaning that you are only covered for the amount of your mortgage, so as you pay your mortgage down the policy is actually worth less and less.  Bear in mind that the premiums increase as you age and this seems like even less of an advantage.

So while mortgage insurance sold by your lender is very likely a convenient option, it may not be the very best option for you.  When it comes to insurance, it’s important to shop around and scope out what’s available to make sure that what you’re getting is truly the best thing for your situation.

Call Informed Financial Growth today at 1-705-740-9909 to discuss all your insurance needs!