Mortgage insurance is typically required when down payments are below 20%. It is important to realize that this type of mortgage insurance is not for you, it is for the financial institution that gives you mortgage. They want to be sure that they get their money back in case if for any reason you are not able to pay your mortgage payments. But what would happen if you were to become critically ill, suffer an accident or die before your mortgage is paid? Would your family be able to keep making the mortgage payments? Would they have to sell your home?
The only thing worse than a home without a mother is a mother without a home, isn’t it? (Carlos Banhelyi)
Main benefits of mortgage life insurance plans
Personal Mortgage life insurance plans offer more flexibility, better security and significantly more value than traditional mortgage insurance. The main benefits of mortgage life insurance plans compared to traditional mortgage insurance from a bank are described below:
- The policyholder of a mortgage life insurance plan is you, not your bank. The benefit is paid directly to your beneficiary. Your family can use the benefits for other purposes besides covering the mortgage: to pay off debts, or, if they can still carry the mortgage payments, they can use it for investing and securing a future income.
- Your mortgage life insurance can pay your entire outstanding mortgage principal amount.
- You can get a much more competitive price than what your bank can offer.
- You coverage is flexible should your needs change.
- Mortgage insurance from the bank offers no discounts on premiums for healthy people.
- With the bank, mortgage insurance is typically a group policy over which you have no control, and it can be canceled at any time without your knowledge.
- If two or more persons are insured with Life Insurance, a 15% discount will apply to the sum of the total Mortgage Life Insurance premiums.
- Your insurance premiums are included as part of your regular mortgage payment.
Before you say yes to mortgage insurance with your bank, research some private institutions for better terms, guaranties and lesser premiums costs.
To explain how it works let’s consider the following example where a mortgage holder has either or:
- a 20 year mortgage for $200,000 with mortgage insurance through the bank
- a 20 year mortgage for $200,000 as a term life insurance plan with mortgage insurance coverage
If the mortgage holder dies when the mortgage was half paid at the time of death:
- in first case, the mortgage insurance policy would pay to the bank the remaining $100,000.
- in second case, the term life mortgage insurance policy would pay to the bank the remaining $100,000 and provide an additional $100,000 for the family.
The conclusion is simple: when purchasing your new home, take the time to shop around for mortgage insurance, obtain a quote and compare the cost for both scenarios prior to making a decision. In case of mortgage life insurance, coverage for your mortgage can start on the date your mortgage is approved. This way, you are protected even before your new purchase closes.
Bottom line, a term life insurance policy gives you added coverage and flexibility over a mortgage life insurance policy. Mortgage insurance policies only cover you for the amount of your mortgage you owe to the bank. As you pay down your mortgage, your coverage amount decreases with it. This is called a reducing balance. With a term life insurance policy, you have a constant level of coverage for the whole term and are getting better value for your monthly payments.