Your home is likely the biggest asset you’ll ever own. So how can you protect it in case something were to happen to you?
As a homeowner, you have a couple of options. You can either:
- protect your mortgage with a life insurance policy from an insurance company, or
- buy mortgage insurance from a bank or mortgage lender.
Mortgage insurance vs. life insurance: How do they each work?
The first thing to know is that life insurance can be a great way to make sure you and your family have mortgage protection.
The money from a life insurance policy usually goes straight to 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.
Life insurance policies, like term life insurance, come with a death benefit. A death benefit is the money that goes to your beneficiaries after you die. The exact amount they’ll receive depends on the policy you buy.
With term life insurance, you’re covered for a set period, such as 10, 15, 20 or 30 years. The premium – that’s the monthly or annual fee you pay for insurance – is usually low for the first term.
If you die while you’re covered by your life insurance policy, your beneficiaries will receive a tax-free death benefit. They can use this money to help pay off the mortgage – or for any other reason they choose. So, not only is your mortgage protected, but your family will also have funds to cover other expenses that they had relied on you to pay.
Mortgage insurance works by paying off the outstanding principal balance of your mortgage, up to a certain amount, if you die.
With mortgage insurance, the money goes directly to the bank or lender to pay off the mortgage – and that’s it. There’s no extra money to cover other expenses, and you don’t get to leave any cash behind for your beneficiaries.
What’s the difference between mortgage insurance and life insurance?
The main difference is that mortgage insurance covers only your outstanding mortgage balance. And the death benefit goes directly to the bank or mortgage lender. This means no money goes to your beneficiary.
With life insurance, though, you get mortgage protection and more. Here’s how it works: Every life insurance policy provides a tax-free death benefit to the beneficiary. This money can cover more than just the mortgage. Your beneficiary may use the money for any purpose. For example, along with paying off the mortgage, the money could also cover:
- any other debts you have;
- funeral costs;
- the cost of child care; and
- other living expenses.
But before you decide between life insurance and mortgage insurance, here are some other important differences to keep in mind:
Who gets the money?
With life insurance, the money goes to your beneficiary or beneficiaries.
With mortgage insurance, the money goes entirely to the lender. You buy mortgage insurance to keep a roof over your family’s head, but you’re really protecting the lender.
Does your coverage decrease over time?
With a life insurance policy, you get mortgage protection along with financial protection for your beneficiaries or loved ones. Plus, the amount of coverage you buy doesn’t decrease over time, even if you repay your mortgage.
With mortgage insurance from a lender, the cost stays the same. But the benefit decreases as you pay down your mortgage. You’re paying the same premium for a dwindling death benefit. Once you pay off your mortgage, your coverage is gone and there is no money for your beneficiaries.
Can you move your policy?
With life insurance, your policy stays with you even if you renegotiate or transfer your mortgage to another company. You don’t need to re-apply or prove your health is good enough to be insured.
With mortgage insurance, however, your policy doesn't automatically move with you if you change mortgage providers. If you move your mortgage to another lender, you’ll have to prove your health is still good.
Which is more flexible, life insurance or mortgage insurance?
With life insurance, your beneficiaries have the flexibility to cover the mortgage balance and more after you die. As the policy owner, you can choose how much insurance coverage you want and how long you need it. And the coverage doesn’t decline unless you want it to.
With mortgage insurance through a bank, you can’t change your coverage. You’re only protecting the outstanding balance on your mortgage.
Do you need a medical exam to qualify?
With life insurance, you may have to answer some medical questions or take a medical exam to be approved for coverage. Once you’re approved, the insurance company won’t ask for any additional medical information.
With mortgage insurance, a bank or mortgage lender may ask some medical questions when you apply. However, they may ask for more medical information if there’s a claim.* Then, they may discover some conditions that could rule out a claim payment.
(*Please note that mortgage insurance rules concerning medical inquiries may vary depending on the bank or financial institution. In some cases, they may not ask any more medical questions after they have approved your application.)
- Get a quote today. Want to apply for your life insurance online? You can, with Sun Life GO insurance. Get started here.
- A Sun Life Financial advisor can address your concerns and help you select an insurance policy that meets your needs. You can meet with your advisor by video or in person. Find an advisor today.
- 7 life insurance mistakes to avoid
- 4 things you should know before getting a mortgage in Canada
- Do you need life insurance when you’re retired?
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.