For the majority of people, the largest purchase they will make in their lifetime is a new home. Life insurance protects people from a pre-mature death that could result in a liquidation sale or fore-closure on their home and is an obvious choice for many. With many different options available, making the right choice is important and although similar, it is important to know the difference between the two.
There are important differences between term and mortgage life insurance that are not well understood by the general public. Often they are not well explained by the bank, mortgage broker or lending institution whose providing the loan. In many instances, mortgage life insurance tends to be purchased by the un-educated consumer, which as we will see, can become problematic down the road.
Mortgage life insurance can be purchased when you sign your mortgage papers and often includes a few simple health questions from the lending institution or your mortgage broker. The premiums can be added to your monthly mortgage payments. This type of policy accomplishes the goal of not leaving your family or business partners in debt and provides the convenience of not having to seek out insurance elsewhere, but at what cost?
To start, just because you are paying the premiums, you may not necessarily be covered. This is because mortgage life insurance policies use post-claim underwriting, meaning the insurance company will only explore your medical history after a claim is made. If you have a pre-existing condition, whether you were aware of it or not, your claim could be denied. In addition, you should be aware that your policy will only pay out on the balance owing on your mortgage at the time of claim. Your monthly premium will remain level while your benefit slowly erodes over time as you pay down your mortgage.
Unlike mortgage insurance, term life insurance is an insurance policy that covers you for set number of years (ie. 5, 10, 20, or 30 years). The monthly premiums are guaranteed for the time period of your choice and the benefit level is fixed and not tied to your mortgage in any way. Medical testing, detailed questionnaires and advanced underwriting are completed before you are even issued any coverage and begin paying premiums.
Term life insurance is also portable, meaning if you switch to a different lender you do not need to apply for a new policy as you would with many mortgage life insurance policies. As mentioned, these policies require more medical questions and the insurance company may want to contact your doctor. Depending on your age and health, premiums may be higher or lower than mortgage life insurance. However, unlike mortgage insurance all medical issues are discussed upfront with less risk of a claim being denied once approved.
Everyone has their own unique set of circumstances which will determine which product works best for them. Being educated and knowing the facts prior to your decision will put you in the best position later on.