- Insurance 101
- Personal Finance Planning
Congratulations on your new home! We understand that buying a house requires immense emotional and financial investments. This makes it even more crucial to protect this valuable asset, should something unforeseen happen to you. When it comes to protecting your home, you have two options in Canada – mortgage insurance and life insurance. But which one is better?
Keep reading below to learn the difference between the two and which would work better for you.
What is mortgage insurance?
Mortgage insurance is a type of insurance policy provided by your bank or mortgage lender to protect your mortgage debt. It is designed to pay off or pay down the mortgage if the borrower passes away. The insurance proceeds go directly to the bank or lender.
What is life insurance?
To understand about life insurance in Canada you can read our previous blog: everything you need to know about life insurance in Canada.
What is the difference between mortgage insurance and life insurance?
While mortgage insurance is designed to pay off your mortgage debt directly to your lender, life insurance is designed to pay out a lumpsum ‘death benefit’ to your loved ones. This gives your loved ones the freedom to use the amount however they deem appropriate.
Term insurance entitles your family to the death benefit, if you pass away within the term set in your policy. Whereas, whole life insurance ensures your family gets the death benefit, irrespective of when you pass away.
Essentially, with term life insurance, you could buy a policy for the period that you expect to have mortgages and dependents that need to be financially protected. This way, if you pass away within the term of your policy, the death benefit goes to your family, and they can use this amount to pay off your mortgages or continue financially supporting your dependents.
The key differences between mortgage insurance and life insurance are:
What factors affect the cost of insurance?
Whereas, both term insurance and whole insurance are dependent on factors such as age, gender, lifestyle, medical history, marital status, and more. Find out more about life insurance in Canada.
Who gets the money?
With life insurance – the beneficiary you name gets the death benefit. Your beneficiary could be a family member, several family members, an estate, a trust, or a charity.
With mortgage insurance – the money goes entirely and directly to the bank. Your family members get no insurance proceeds.
Which type of insurance is more cost-effective?
For easy understanding, let’s compare the costs for life insurance vs mortgage insurance in Canada.
Which insurance offers more flexibility – life insurance or mortgage insurance?
With life insurance, you are the policy owner, and you have the freedom to decide the term of your coverage, the amount of coverage, and your beneficiaries. Your beneficiaries too have the freedom to use the ‘death benefit’ however they deem appropriate.
With mortgage insurance, your mortgage lender is the policy owner and the sole beneficiary of the policy. Thus, not only does your coverage decline as your mortgage amount reduces, but the insurance policy also ceases to exist after the mortgage is paid off.
Life insurance or mortgage insurance : which one is better?
Your home is most likely the biggest asset you will ever own. But it won’t be of greater value than your family.
Unless you have unique needs or specific goals, life insurance is generally considered safer, more flexible, beneficial, and affordable as compared to mortgage insurance. Check how much would term life insurance cost you today by using our quick insurance assessment calculator.
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