You will definitely hear the term mortgage insurance in the process of seeking financing for your new home. It will be packaged as “protection for your family” although you will probably feel that it’s an unwelcomed guest looking to stretch tighter your already stretched budget. As a new or subsequent homebuyer, you already have a myriad of decisions and tasks concerning insurance. Yet there are two terms, “mortgage insurance” and “term life insurance”, that will give you a headache. It’s important to understand these terms and decide which one is best suited for you based on your current circumstance.
Mortgage Insurance
This is, in the simplest term, a life coverage for your mortgage. This insurance is tied to your mortgage, which means that if your mortgage is payable in 20 years the cover also is. It is, therefore, a protection for your family members and an assurance that they will be able to pay off and live in the home in the event of your death.
Mortgage insurance policies are structured differently. There are some with a declining death benefit, which means that as you continue paying off your mortgage, the value of the insurance also diminishes for it to be commensurate with the amount remaining. However, the premium you pay will not change even in this case since the premium is calculated based on the average of the policy duration.
Term Life Insurance
Term life insurance and mortgage insurance serve a similar purpose but they have differences in a few areas. First, the payout for term life insurance remains the same until the end of a term, but with a mortgage insurance from the bank, the payout decreases with a decrease in your mortgage balance.
Another key difference is in portability. While you can carry a term life insurance with you and can even consolidate all your coverage to a single policy, this is not possible with mortgage insurance as it is attached to the mortgage only.
Should You Choose Mortgage Insurance when You Already Have Life Insurance?
You may not need more coverage if you have a life insurance policy that offers sufficient protection, although it’s best to discuss this with your insurance broker. If you have a universal or whole policy but it does not offer complete coverage, then you can consider adding a term policy because even if the former expires, you will still be left with the life policy.
Adding a mortgage insurance or a term life insurance will give you a “peace of mind” to know that your family will receive a death benefit and there will be extra money to ensure they can complete the mortgage payment. Once you pay off all your mortgage, you can allow the term policy to expire and have the other policy as the death benefit for your loved ones.
What Is the Ideal Amount of Life Insurance?
You can never have too much life insurance, but you can definitely have too little. Talk with an insurance professional or calculate your insurance needs using online tools so that you know how much coverage is sufficient. With this in mind, a good term life policy will offer better protection for your family and investment as opposed to mortgage insurance.
Featured Image: depositphotos/ stokkete
Posted on June 26, 2018
