Mortgage insurance versus personal life insurance

Your home may very well be the largest purchase you ever make; consequently, your mortgage may also be your family’s greatest liability if a primary income earner should die prematurely.

How do you help ensure that your loved ones will not be saddled with a massive debt if the unthinkable happens to you or your spouse?

To solve this problem, many new homeowners sign up for mortgage insurance offered by most lending institutions when you are approved for a mortgage. And without research, many buyers are unaware that there are more flexible options available. Here are some reasons to consider a personal term life insurance policy instead.

Declining Coverage
Since mortgage insurance is designed to cover only the outstanding mortgage balance, your coverage will decrease as the mortgage balance decreases. This means that in 10 or 20 years when your mortgage is significantly smaller, your insurance will still only cover the outstanding balance—but your premiums will remain the same. With personal term life insurance, your coverage will not decrease over time, and you may have the option of increasing your coverage down the road.

The mortgage insurance offered by most lending institutions tends to be more expensive than personal term life insurance. I compared prices for a healthy 30-year-old couple with a $500,000 mortgage, checking several major lending institutions. The monthly cost through the lending institutions ranged from $75 to $110 per month to insure both people. In contrast, personal life insurance policies through London Life would cost $48 to $64 per month (combined), depending on which term you choose.

What happens when you refinance your home, or move your mortgage to a different institution? In most cases, you will have to re-apply for your mortgage insurance; this can even be the case when you are simply renewing your current mortgage. In addition, every time you re-apply for your insurance, your rates may go up, since you will be older. With personal term life insurance, you own the policy and will not have to make changes to your policy if you move or refinance your mortgage.

Convertibility and flexibility
A personal term life insurance policy can usually be converted to a permanent, whole life policy later on, if you choose. You may be able to increase your coverage (assuming good health). You will also have the option of changing your beneficiaries, covering other needs besides the mortgage, and keeping the policy after your mortgage is paid off. None of these options are available with the mortgage insurance offered by most lending institutions.

When you buy a personal term life insurance policy, your acceptance and prices are based on your age, health, and lifestyle. Once you are approved, the insurer cannot cancel or revoke your policy and you can be confident that your beneficiaries will be paid in full upon your death (barring fraud or exclusions, of course). However, with the mortgage insurance offered by most lending institutions, the underwriting is done when you die, not when you apply. This means that if any health issues are uncovered that could be considered unreported, your claim may be denied.

While in general I would always recommend that clients buy a personal term life insurance policy instead of mortgage insurance, there is one notable exception: when your health or lifestyle prevents you from qualifying for a private policy. If you are uninsurable, a smoker, or live a high-risk lifestyle, you may be better off getting mortgage insurance through your lending institutions since you are more likely to be approved and the rates will not be affected. In these circumstances you may not qualify for a personal life insurance policy, or it may cost more than is reasonable for you.

Each case should be evaluated based on your own needs and situation, and a financial security advisor can help you sort out the options and pricing available to you. No matter what you end up choosing, it will feel great to know that you’ve helped protect your family’s financial security.