What is mortgage protection insurance?
Thinking of buying a new home? Your mortgage lender may offer the option of buying mortgage insurance (also known as creditor insurance). But do you really need it? Or do you need mortgage protection insurance instead?
They sound similar, but they’re not the same.
Mortgage protection insurance is a life insurance policy that offers your family or beneficiaries a certain amount of money if you were to die. In such a case, with an active life insurance policy, your beneficiaries would receive a tax-free amount of money, called the death benefit. (The exact amount they’ll get depends on how much coverage you have.)
With a life insurance policy, you get to:
- keep your coverage even as you pay off your mortgage,
- keep your coverage even if you move, and
- select a beneficiary to inherit the death benefit.
With life insurance, you’re leaving your beneficiaries with the flexibility to use the death benefit in any way, for any reason. For example, they can use that money to cover:
- mortgage payments,
- debts,
- the cost of childcare, or
- the cost of other living expenses.
When buying insurance, remember to make sure that you have enough coverage to meet your family's financial needs, whether it's making mortgage payments, paying off debts or anything else.
Mortgage insurance through a bank or lender, however, works differently.
It can only be used to pay off some or all of the remaining amount owed on your mortgage in the event of your death. But the money won’t go to any beneficiary. Instead, it goes directly to your bank or mortgage lender.
Mortgage insurance pays all or part of your mortgage debt, but it doesn’t leave any money for your family. And, your family’s financial needs may go beyond just a mortgage. They may have other expenses to cover as well. That’s why you may want to consider mortgage protection insurance instead.
What type of mortgage protection insurance do you need?
Mortgage protection insurance is a life insurance policy. So what type of life insurance can protect your mortgage and your family’s future? The most affordable option is term life insurance.
How long are you covered? With term life insurance, you’re covered for a set period, such as 10, 15, 20 or 30 years.
Is it low cost? The premium – that’s the monthly or annual fee you pay for insurance – is usually low for the first term.
What happens if you die during your term? Then your family or beneficiaries would receive a tax-free death benefit. They can then use the money from this benefit for any purpose. This means your family will have funds to cover expenses that they relied on you to pay, including making mortgage payments.
The difference between mortgage protection with term life insurance and mortgage insurance
Most mortgage lenders will give you the option to apply for mortgage insurance directly through them. But before you finalize your mortgage, think about how different their policies are from ours.
