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Writer's pictureShameless Spender

Insurance and Mortgages: What Every Homebuyer Needs to Know

A happy couple in new home
Enjoy your home with confidence - be insured!

Life insurance and mortgage insurance are both linked to homeownership, yet they have different objectives. Lenders often mandate life insurance if your down payment is under 20%, but you might also opt for it to support the needs of your survivors. If you are just starting out together you will both benefit from this comparison of the two.


1. Purpose
  • Life Insurance: This form of insurance provides financial protection for your loved ones in the event of your death. It ensures that your beneficiaries (such as family members or dependents) will receive a lump-sum payout, which can be used for to pay off your mortgage and other debts, covering living expenses, and maintaining their quality of life.

  • Mortgage Insurance: This type of insurance is specifically designed to protect your mortgage lender in the event of your death, disability, or sometimes job loss. The idea is to ensure that the mortgage debt is paid off if you are unable to do so.


2. Coverage
  • Life Insurance: The payout from life insurance can be used for a wide range of expenses, such as mortgage payments, funeral costs, medical bills, children’s education, and more. It is not limited to just the home loan.

  • Mortgage Insurance: The coverage from mortgage insurance is limited to paying off the mortgage balance in the event of your death or disability. It is specific to the outstanding loan amount and generally will not cover any other debts or financial obligations.


3. Who is Protected?
  • Life Insurance: Protects your family or beneficiaries. The payout goes directly to the named beneficiary, who can then decide how to use the funds.

  • Mortgage Insurance: Protects the lender, not the borrower or their family. If the borrower dies or becomes unable to pay, the insurer pays the lender (or sometimes the mortgage balance).


4. Who Benefits from the Payout?
  • Life Insurance: The payout goes to the policy’s beneficiaries you designated.

  • Mortgage Insurance: The lender receives the payout, not your family.


5. Cost
  • Life Insurance: The cost of life insurance can vary depending on factors such as your age, health, coverage amount, and the type of life insurance. Term life insurance, which is often more affordable, can be structured to cover the mortgage for a set period (e.g., 20 years).

  • Mortgage Insurance: The cost of mortgage insurance is a percentage of your loan (ranging from 2% to 4% of the original loan amount annually). However, it can be relatively expensive if you're required to pay it for the full duration of the loan.


6. Types of Insurance
  • Life Insurance:

    • Term Life Insurance: Provides coverage for a specific period (e.g., 10, 20, or 30 years). This type is often used to cover the length of the mortgage or longer.

    • Whole Life Insurance: A permanent policy that covers you for your entire life, with an investment component that builds cash value over time.

    • Universal Life Insurance: A flexible, permanent policy that combines a death benefit with an investment savings component.

  • Mortgage Insurance:

    • Private Mortgage Insurance (PMI): Typically required for conventional loans when your down payment is less than 20%.

    • Mortgage Life Insurance: Sometimes offered by lenders directly, this is a specific policy that only pays off the mortgage balance in case of death, and it decreases over time as the loan balance decreases.


7. Duration
  • Life Insurance: The term or duration depends on the type of policy. Term life insurance lasts for a specified period (e.g., 20 or 30 years), while whole life and universal life insurance are meant to last your entire life.

  • Mortgage Insurance: Generally lasts for the life of the loan or until you’ve built up enough equity (typically when the loan-to-value ratio drops below 80%). In the case of PMI, it may be cancellable once the mortgage balance falls below a certain threshold.


8. Eligibility
  • Life Insurance: You can apply for life insurance at any time, though the premiums may increase with age or if you have health issues. Life insurance is cheaper the younger you are when you apply.

  • Mortgage Insurance: Typically required by the lender if you have a small down payment. PMI is usually not an option you can opt for on your own; it's something the lender imposes. If you have personal life insurance you simply select or deselect the box on the mortgage application indicating you do not need their insurance.


9. Impact on Your Family
  • Life Insurance: Offers flexible financial support to your family, allowing them to use the payout however they see fit. This can include continuing to pay the mortgage, but it could also help them with other financial needs.

  • Mortgage Insurance: Only helps in paying off the mortgage. While this can prevent your family from losing the home due to an unpaid loan, it does not provide funds for other living expenses, nor does it help with other financial obligations.


Overview

Feature

Life Insurance

Mortgage Insurance

Purpose

Financial protection for family

Protection for lender in case of default

Beneficiaries

Family or designated person

Lender

Coverage

Broad (debts, living expenses)

Limited to mortgage balance

Cost

Varies by type, age, health

Usually a percentage of the loan amount

Duration

Depends on policy (term or life)

Until mortgage is paid off

Required?

Optional, depending on needs

Often required for low down payments

Payout Use

Flexible, any financial need

Only to pay off the mortgage

Other differences

Medical exams
  • Life Insurance can take longer to put in place, 2 – 8 weeks, because it involves delving into your medical history.

  • Mortgage Insurance usually only requires answering a few health-related questions.


Portability
  • Life Insurance Personal life insurance can be used to cover any home with any mortgage lender or repayment terms.

  • Mortgage Insurance only applies to the same home under the same terms with the same lender.


NEW RULES as of DECEMBER 15, 2024:


  1. Life Insurance is available for different lengths of time which means you can implement a policy to cover the new rules NOW! First-time homebuyers in Canada will have access to 30-year mortgage terms.


  2. Mortgage Insurance is currently available for homes priced below $1million. Buyers of homes valued above that threshold are required to make a minimum down payment of 20%. This has been challenging for homebuyers looking at home prices above $1 million. Starting December 15, 2024, the insured mortgage cap will rise from $1 million to $1.5 million.


Other insurance coverage to consider

You may also wish to consider critical illness insurance. If you’re diagnosed with a serious condition, it provides a one-time tax-free payment you can use for what you want, like paying off medical expenses, your mortgage and or debt. Your contract will define which conditions you’re covered for, but some examples include cancer, heart attack or stroke.


Take away:
  • Life Insurance is more comprehensive and flexible, helping your family in many aspects of life beyond just the mortgage.

  • Mortgage Insurance protects the lender and ensures that the mortgage is paid off in case of your death or disability, but it does not provide the same level of flexibility or financial support to your family.


What's next?

Now that you understand more about the differences between and personal life insurance and mortgage life insurance, why not meet with me?

  • Determine the type of life insurance that best meets your needs

  • Get a competitive quote on life insurance coverage

  • Find out if you need other types of insurance such as critical illness insurance



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Work with a trusted, experienced insurance agent online or in person.

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