Mortgage insurance vs. mortgage life insurance
- November 9, 2023
- Posted by: olinsadmin
- Categories: Insurance Toronto, Mortgage Insurance
Mortgage insurance and mortgage life insurance – what is the difference? Maybe it’s just one and the same thing?
When it comes to purchasing a home in Canada, many buyers are introduced to the concept of insurance. Two common types of insurance associated with mortgages are Mortgage Insurance and Mortgage Life Insurance. While they sound similar, they serve distinct purposes and have different implications for homeowners. In this article, we’ll delve into the differences between these two types of insurance, helping you make an informed decision about which one might be right for you.
What is mortgage insurance?
Mortgage Insurance, often referred to as CMHC (Canada Mortgage and Housing Corporation) insurance, is a form of protection for lenders. It is mandatory for buyers who put down less than 20% of the purchase price of the home. This insurance safeguards the lender in case the borrower defaults on their mortgage payments. Essentially, it provides a safety net for the lender, ensuring they can recover some or all of their losses if the borrower is unable to meet their financial obligations.
Key characteristics of mortgage insurance
Mandatory for low down payments
If a buyer puts down less than 20% as a down payment, they are required to obtain mortgage insurance.
The premium for mortgage insurance is calculated as a percentage of the loan amount and can be paid upfront or added to the mortgage balance.
No direct benefit to the borrower
Mortgage insurance does not directly benefit the homeowner. Its primary purpose is to protect the lender.
Once the homeowner’s equity in the property reaches 20%, mortgage insurance is no longer required.
What is mortgage life insurance?
Mortgage Life Insurance is an optional insurance policy that provides financial protection for your loved ones in the event of your death. This insurance pays off the remaining mortgage balance in full if the policyholder passes away during the term of the policy. It provides peace of mind, ensuring that your family won’t be burdened by the mortgage in the event of your untimely demise.
Key characteristics of mortgage life insurance
Unlike mortgage insurance, mortgage life insurance is not mandatory. It’s an optional policy that homeowners can choose to purchase.
The proceeds from the policy are paid directly to the beneficiary designated by the policyholder, typically a spouse or family member.
Covers the mortgage balance
If the policyholder passes away, the insurance pays off the remaining mortgage balance, providing a significant financial relief for the family.
Premiums based on age and coverage amount
The cost of mortgage life insurance is determined by factors such as the age of the policyholder and the amount of coverage chosen.
Mortgage life insurance policies are typically set for the same term as the mortgage, but this can vary depending on the policy terms offered by the insurer.
Big question: WHO IS PROTECTED?
tgage insurance from a bank protects the bank, not you
The bank wants to be sure that they get their money back in case if you were to become critically ill, suffer an accident or die before your mortgage is paid. The bank does not care if your family would be able or not to keep making the mortgage payments – they need their money back, here and now.
Mortgage life insurance from an insurance company protects you and your family
The first thing to know is that mortgage life insurance can be a great way to make sure your family has mortgage protection. The money from a life insurance policy usually goes right into the hands of your beneficiaries – not the bank or mortgage lender. Your beneficiaries are whoever you choose to receive the benefit or money from your policy after you die.
Here are some explanations with numbers
- You have a 20 year mortgage for $200,000 with traditional mortgage insurance through the bank. In case if something happen to you when the mortgage has been half paid, the mortgage insurance policy would pay to the bank the remaining $100,000.
- You have a 20 year mortgage for $200,000 as a term mortgage life insurance plan through a life insurance company. In case if something happen to you when the mortgage has been half paid, then the term life mortgage insurance policy from a life insurance company would pay the whole amount of $200,000 to your family.
While both Mortgage Insurance and Mortgage Life Insurance are related to mortgages, they serve fundamentally different purposes. Mortgage Insurance protects the lender by ensuring they can recover losses if the borrower defaults, while Mortgage Life Insurance provides peace of mind to homeowners, assuring that their loved ones won’t face financial hardship in the event of their passing.
Before buying your new home, do your homework – take the time to shop around for both scenarios; obtain the quotes and compare the costs. The choice between these two types of insurance depends on your individual circumstances and priorities.