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? To start, homeowners have a few options to choose from. You can either:
- ensure you have mortgage protection with a life insurance policy from an insurance company or
- get 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 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.
Life insurance policies, like term life insurance, come with a death benefit. A death benefit is the amount of money given 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 coved by your life insurance policy, your beneficiaries will receive a tax-free death benefit. They can then use this money to help pay off the mortgage or for any other reason. So not only is your mortgage protected, but your family will also have funds to cover other expenses that they 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 to 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, that money goes directly to the bank or mortgage lender, not your beneficiary. This means that there’s no cash, payout or benefit given to your beneficiary.
With life insurance, however, you get mortgage protection and more. Here’s how it works: every life insurance policy provides a tax-free amount of money (the death benefit) to the beneficiary. The payment can cover more than just the mortgage. The beneficiary may then use the money for any purpose. For example, apart from paying off the mortgage, they can also use the funds from the death benefit to cover:
- any of your remaining debts,
- the cost of child care,
- funeral costs,
- the cost of child care, and
- any 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 whomever you name as your beneficiary.
With mortgage insurance, the money goes entirely to the bank.
Can you move your policy?
With life insurance, your policy stays with you even if you transfer your mortgage to another company. There’s no 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 bank, you’ll have to prove that your health is still good.
Which offers more flexibility, 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 don't have the flexibility to change your coverage. In this case, you’re only protecting the outstanding balance on your mortgage.
Do you need a medical exam to qualify?
With a term life insurance policy from Sun Life, you may have to answer some medical questions or take a medical exam before you’re approved for coverage. Once you’re approved, Sun Life won’t ask for any additional medical information later on.
With mortgage insurance, a bank or mortgage lender may ask some medical questions when you apply. However, if you make a claim after you’re approved, your bank may ask for additional medical information.* At that point, they may discover some conditions that disqualify you from receiving payment on a claim.
(*Please note that mortgage insurance rules concerning medical inquiries may vary depending on the bank or financial institution. In some cases, you may not have to answer any additional medical questions after your policy has been approved.)
Does your coverage decrease over time?
With a life insurance policy, you’re getting mortgage protection and the chance to financially protect your beneficiaries or loved ones. Plus, the amount of coverage you buy doesn’t decrease over time, even if you repay your mortgage.
With a mortgage insurance plan from a bank, the cost stays the same. But the benefit decreases as you pay down mortgage. If you pay off your mortgage, your coverage is gone and there are no funds given to your beneficiaries.
- 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 help you select an insurance policy that meets your needs and address any concerns you may have. Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.