Updated: Oct 14, 2020
Not only is buying your first home a stressful part of your life, but thinking about insurance on top of that is not something you're jumping in glee over. When you purchase your first home you will probably have a lot of people talking about mortgage insurance with you, and it can be overwhelming/confusing.
Let's first dive in to the topic of mortgage insurance, what is it? Why do I need it?
It is simply a term policy that is designed to cover your mortgage if you die during a specific amount of time. Some policies are designed to have a decreasing death benefit over time. This is in accordance with your mortgage loan; as time goes by and you've been paying monthly premiums, the amount of coverage lessens. Unfortunately this doesn't change the amount of premium you are paying monthly.
For example, if you have a 30 year mortgage insurance policy it will cover the amount owed on your mortgage. This is to ensure that your family will not be stuck paying off the home if you were to pass away.
Although these policies can be bought easily at the bank or through a lender, you can't use the money freely, and you are required to use it to pay off the mortgage on your home, which may not be the best use of the money at that time.
Term life insurance on the other hand is a better solution to protect your mortgage. This type of insurance does the same thing: it protects your family against any financial obligation (including mortgage payments) if something were to happen to you. This type of coverage has its benefits as well. The bonus is that you can combine all the coverage you need under one policy: mortgage protection, debt, car payments, education funds etc.
Here is what mortgage insurance through your bank looks like:
1. The bank owns and controls the policy
2. Premiums are not guaranteed. No discounts based on your health.
3. The coverage decreases with mortgage balance but your cost per month is the same.
4. The beneficiary of this policy is the bank.
5. This coverage is not portable, you may need to reapply later on.
Here is what mortgage insurance through a personally owned life insurance policy looks like:
1. You own and control the policy
2. Premiums are guaranteed. Discounts are available based on your health.
3. The coverage stays the same over time.
4. You choose who and how to use the insurance proceeds at time of claim.
5. The policy stays with you and doesn't disappear once your mortgage is payed off.
Mortgage insurance through the bank could seem like the simpler decision because you're already sitting at their desk, and it's one thing off your to do list at the end of the day. But, purchasing a life insurance policy that is personally owned can be cheaper, covers more than just your mortgage, and you have more freedom.
If you're in the process of buying a home, or you already have a home and a mortgage through the bank, let's talk. It could be a very easy switch, and you'll be happy you did.