Mortgage Life Insurance vs. Term Life Insurance

When homebuyers find the words “mortgage” and “insurance” in the same sentence, confusion often follows. In the US and Canada there is a financial product called mortgage insurance, which protects the lender in loans with a lower down payment. However, there is also another financial product called mortgage life insurance, which is a special type of policy designed to cover your mortgage if the insured dies earlier than expected, leaving a mortgage balance. 

A mortgage life insurance policy shares some similarities with a term life insurance policy. But for many US and Canadian households a term life insurance policy offers more flexibility and is a more powerful financial planning tool.

How does mortgage life insurance work?

A mortgage life insurance policy is usually sold through a lender or loan broker. As you might expect based on the name, mortgage life insurance targets coverage for your mortgage itself. Because your mortgage balance goes down over time, the death benefit for mortgage life insurance also decreases over time. During the first few years of coverage, the death benefit before your mortgage life policy remains relatively stable. But in later years, the policy payout in a claim decreases.

If you have a claim with a mortgage life insurance policy, the policy usually pays your lender rather than your spouse or another designated beneficiary. It would be fair to think of a mortgage life insurance policy as a policy for your lender, although your family and dependence might also benefit from the policy because the policy pays off the mortgage.

It is also important to note that mortgage life insurance policies typically limit covered claims to accidental death. This means many common causes of death would not be covered by the policy.

How is term life insurance different from mortgage life insurance?

A term life insurance policy offers many more customization options to protect your family in more ways than a mortgage life insurance policy. A mortgage life insurance policy focuses only on your mortgage balance. By contrast, a term life insurance policy can provide ongoing income, pay for college costs, pay off your mortgage, or provide for your children until they are grown and on their own.

Depending on your age, you can purchase term life insurance in coverage lengths ranging from 5 years up to 40 years, making a term life insurance policy much more flexible than a mortgage life insurance policy.

Many term life policies also offer living benefits, which allow you to use your policy coverage in the event of critical illness or certain other situations. In addition to providing living benefits, term life insurance policies cover many more causes of death when compared to mortgage life insurance.

Contact your broker to learn more.

For many households, a mortgage life insurance policy may be too limiting, and its focus too narrow. A mortgage may be the largest single expense for many families, but we all know plenty of other bills arrive in the mailbox each month. A term life insurance policy offers a more effective way to plan for the unexpected and to be certain your family is always protected. 

The right life insurance policy is probably more affordable than you might realize. Just reach out to get a quote and learn about the best ways to protect your home and your loved ones.