Throughout history there have been many classic heavyweight boxing bouts. And in the world of personal finance, few face-offs are as exciting as the one between life insurance and mortgage insurance. It’s right up there with Ali vs. Frazier, Tyson vs. Holyfield or Rocky vs. Apollo Creed – well, not quite but you get the picture.
Like boxing, buying a home can make you sweat. It’s an overwhelming and stressful experience, so even though you want to protect your family’s home should anything happen to you – likely the last thing you want to do is read one more contract. That’s why when your lender suggests you tack mortgage insurance onto your monthly mortgage payments, it’s very tempting to just say ‘yes’ and call it a day.
But not so fast!
Mortgage insurance may seem like the natural choice – after all it has the word ‘mortgage’ right in the name! But before you sign on the dotted line, you may be interested to learn what happened when we put these two insurance products in the ring together.
To walk us through this matchup, I’ve enlisted Financial Advisor Jason Ransome from Ransome Financial Inc. to be our special guest referee!
Let’s get ready to rumble!
Round 1: Death benefit – The final payout
If you die, both mortgage and life insurance are intended to pay off your mortgage so that your family isn’t saddled with the financial burden. But early on in the match we can already see that life insurance can do a lot more for your family than mortgage insurance.
Life insurance enables you to protect your family’s overall lifestyle and future. You can plan to cover your mortgage (of course) as well as other expenses like funeral costs, debts, school tuition for your kids and even replace your income for a period of time.
Mortgage insurance on the other hand only pays off your mortgage, which may not be enough protection for your family.
“I’ve seen many instances where people with mortgage insurance still lose their homes because the surviving spouse struggles to pay the property tax on top of other life expenses,” says Ransome. “With mortgage insurance, those additional costs are simply not covered.”
Round 2: Cost – The value you’re getting for your money
When it comes to mortgage insurance, Jason tells it like it is: “You just don’t get the same bang for your buck.”
That’s because mortgage insurance only covers the amount remaining on your mortgage at the time of the claim. This means that every time you make a mortgage payment, the value of your insurance is actually declining.
Now here’s the kicker: your monthly insurance premium stays the same despite the fact the coverage is losing value every month! Yes, that’s right, you’re paying the same price for insurance that is worth less overtime. With most types of life insurance, your coverage and premiums stay the same for the entire length of your policy.
It’s only round 2 but mortgage insurance’s stamina is already starting to fade.
Round 3: Beneficiary – Who really benefits from the insurance policy?
Your mortgage insurance policy is linked to the mortgage, which means that in the event of your death the beneficiary is actually the lender (bank, credit union, private lender, etc.) – not your family.
“This means you don’t really own the policy because you’re not in control of it. It’s doing more to protect the lender than the borrower,” says Ransome.
According to Jason, too many people depend on insurance that they don’t own, such as group benefits or protection through their workplace. And while some insurance may be better than no insurance, Jason makes a great point: “insurance is meant to protect your family’s future so why would you rely on someone else to be in control of that?”
“With life insurance, you own the policy, so you determine the amount of coverage needed and you designate the beneficiary (your family),” explains Ransome.
As round 3 comes to a close, we’re not even sure who mortgage insurance is fighting for. Is it your family or the bank?
Round 4: Portability – Which policy can keep up with your movements?
When it’s time to renew your mortgage, you might want to switch to a lender that offers a lower interest rate. But if you do switch, you’ll have to re-apply and re-qualify for mortgage insurance because your mortgage insurance policy is tied to the original lender (remember – they’re the beneficiary).
This means you can’t just pick up your mortgage insurance and bring it with you to your new lender. And this lack of “portability” can cost you.
“Many times, people will switch to a new mortgage provider that is offering them a lower interest rate before realizing that it may impact the cost of their mortgage insurance,” Ransome explains. “Because each time you re-apply for mortgage insurance, you’re older and your health status may have changed, causing your premiums to increase.”
Mortgage insurance is stumbling back into its corner as we head into the final round!
Round 5: Convenience – Is ‘quick and easy’ worth it long-term?
Many people have mortgage insurance because of its convenience – you can purchase coverage directly from the financial institution that’s lending you your mortgage. And your premiums are often tacked on to your monthly mortgage payment.
“The problem is that people are presented with mortgage insurance by professionals who are not necessarily trained to properly explain the pros and cons in-depth,” says Ransome.
“Mortgage insurance applications are quick and easy – they only ask about five questions. Life insurance applications ask thirty or more questions and often require a medical exam, so it’s no surprise that mortgage insurance doesn’t offer the same level of coverage. And some people who are approved for mortgage insurance would actually have been declined for life insurance. Plus, just because you’re approved, that doesn’t mean your mortgage insurance will actually pay out.”
Moral of the story is: convenience is great, but not at the expense of quality protection for your family.
And that’s the final bell!
Summary: Let’s go to the judge’s scorecards!
By now, it should be obvious based on mortgage insurances’ bruised and battered appearance that life insurance is the clear winner. But to sum up our analysis, Jason highlights the three main factors that cost mortgage insurance this fight:
- With mortgage insurance you cannot name a beneficiary
- You also cannot apply for more coverage than mortgage debt – as a result, most people are underinsured
- Mortgage insurance is a decreasing benefit – why choose coverage that decreases when you could purchase protection that never loses value?
“The future is all about options,” says Ransome. “You can’t predict what’s going to happen so you want to set yourself up with the most options, and life insurance is the best way to do that.”
If you’re now in the market for mortgage protection, you may want to consider term life insurance from Foresters Financial. You can select coverage that matches the length of your mortgage (e.g. a 30 year term to match your 30 year mortgage) and depending on your policy, you may have the option to extend your coverage by converting your term policy to a whole life policy down the road.
Term life insurance compared to Mortgage insurance
|Term life insurance||Mortgage insurance|
|You own the policy||The lender (e.g. bank) owns the policy|
|You name the beneficiary||You cannot name the beneficiary because the lender is the beneficiary|
|For most types of life insurance, death benefit and premiums stay the same over the course of your policy||Death benefit decreases along with your mortgage – but your premiums stay the same!|
|Protects your lifestyle – e.g. mortgage, income replacement, final expenses, children’s tuition, etc.||Protects your debt – i.e. the amount of your mortgage at the time of claim|
|Your insurance is tied to you, so even if you change lenders your policy remains unaffected||Your insurance is tied to the mortgage lender, so if you change lenders, your policy is terminated and you must re-apply / re-qualify for coverage from your new lender|
|Your policy can cover you for your whole life or a term of your choosing||Your insurance ends with the term of your mortgage|
414855 CAN/US (04/17)
Foresters, their employees and life insurance representatives, do not provide, on Foresters behalf, financial advice. Prospective purchasers should consult their individual advisor.