Is Life Insurance Good for Mortgage Protection?

home_basedMost people never buy anything as expensive as their homes throughout their lifetimes. In order to make such a large purchase, people obtain a mortgage that must be paid over several years. In the unfortunate event that one spouse passes away prematurely, the other spouse would need to be prepared to continue making the monthly payments on his or her own. If this isn’t possible, the family will lose the house.

Homeowners can purchase life insurance to protect their families against the possibility of losing their homes if the main breadwinner passes away. One of the best products for this purpose is term or permanent life insurance. 

You also may purchase mortgage life insurance. However, mortgage life insurance is designed for one purpose only: to pay the lenders. Insurance companies and lenders know this, and it becomes evident when you are posed with the option to buy mortgage life insurance after securing a mortgage rate at Kanetix.ca. When people purchase mortgage life insurance, they cannot choose their beneficiaries like they can with a term or permanent life insurance policy. The lenders will be the beneficiaries, and the proceeds will go directly to them upon the death of the policyholder.

The Problems with Mortgage Life Insurance

In some cases, homeowners don’t remain with the same lenders. They may decide to move or refinance their loans. If they do so, they cannot alter their mortgage insurance policies to name their new lenders as beneficiaries. Furthermore, mortgage insurance policies are not joint policies. If one spouse passes away, the mortgage insurance policy terminates, and the family is no longer protected with life insurance.

Term life insurance policies can be purchased for a set number of years. Sometimes, people decide that they would like to convert the policy into a permanent one, and they can do so if they have a term life insurance policy that is not a mortgage term life insurance policy. A mortgage term life insurance policy does not allow for this type of conversion.

Lastly, the insurance company determines how much people must pay per month to keep their policies active. It’s very likely that a mortgage insurance policy will be less expensive than a term life insurance policy, but the death benefits will not remain constant like they will with a term life insurance policy. As time goes by, the loan’s principal decreases, and so will the death benefits.

Term Life Insurance and Mortgage Life Insurance Compared

At the time that you purchase a term life insurance policy, they decide how much money they would like to leave to their dependents. If the policyholder passes away while the policy is active, the beneficiaries receive the same amount of money whether it is the first year, the fifth year or the tenth year that the policy has been in effect.

A couple may purchase a 30-year term policy that would leave $250,000 to the beneficiaries. Throughout the life of the policy, the premiums would remain the same. In contrast, a mortgage insurance policy worth $250,000 would be worth zero after the 30 year term is over, but the premiums would have remained the same over the years. This means that the policyholders would pay the same amount each month for a product that is decreasing in value as the years go by.

How Life Insurance Can Be Used

As was mentioned above, the mortgage insurance can only be used to pay the remainder of the mortgage loan. Life insurance can be used for this purpose and several others, including the following:

• To maintain the families’ lifestyle
• To pay for the children’s college educations
• To create a retirement fund for the surviving spouse
• To pay funeral and burial expenses
• To provide for aging parents
• To offer a gift to charity
• To pay other debts in full
• To finance future purchases, such as cars

Because life insurance can cover so much more than a mortgage insurance policy can, you may wish to purchase life insurance that will pay their mortgages in full as well as their other needs. They will only need to decide what type of life insurance they believe would best suit their purposes. They have several choices, but the most common are the term policy and the permanent policy.

Term and Permanent Policies

A term policy is very affordable and is a good choice for those who want to protect their families’ interests but don’t have a lot of money. They can purchase a policy that lasts a set number of years that is called the “term.” The term can be 10 years, 20 years or even 30 years, and the policies can be renewed if the policyholders survive the term. However, you must keep in mind that as they grow older, their premiums will increase as they renew their policies. This is why it is important save money from the start by shopping around using websites like Kanetix when purchasing life insurance.

Permanent policies, on the other hand, do not need to be renewed. If the policyholder pays the premiums, the policy will remain in effect until maturity.

Since 2009, Lucas Taylor has worked for Kanetix.ca as a contributing writer. His background in personal finance provides him with a unique perspective on issues and topics pertaining to financial services in Canada. Lucas covers trends and developments in the financial industry, with a focus on insurance, mortgages and personal finance.

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