If you’re struggling to decide on the types of insurance you need, we want to help you understand the benefits and drawbacks of both life insurance and mortgage insurance in Canada. Below, our team at Alliance Income explains the key differences and how they work to protect your interests.
Types of Mortgage Insurance
Let’s start off by disentangling the confusion that the term “mortgage insurance” carries. This term can refer to several types of Canadian insurance policies affiliated with mortgage loans and the payment of mortgage debt:
Private mortgage insurance (PMI), also known as mortgage default insurance, is a type of insurance that conventional mortgage lenders generally require of borrowers who make less than a 20% down payment. The purpose is to protect the lender if the borrower defaults on payments of outstanding debt through financial irresponsibility or death. In some cases, the financial institution will require that a borrower purchase this type of insurance from the Canada Mortgage and Housing Corporation (CMHC) if unable to make the 20% down payment.
Mortgage title insurance is an optional insurance that protects both the mortgage lender and borrower from financial losses resulting from a “bad title” (that is, claims by a third party, such as the heir of a previous owner of the property, to liens, easements, and encumbrances that the lender’s title search did not uncover).
Mortgage life insurance, on the other hand, is an optional insurance that protects the survivors of the borrower if the borrower dies while still owing mortgage payments. It will pay off the balance of the mortgage to the lender upon your death. You may purchase it through the lender or through a private insurance company.
Mortgage life insurance does not usually require a medical exam, and it may have no health questions. For people with medical conditions who are not able to qualify for life insurance, mortgage life may provide a feasible alternative to ensure that their family will not be saddled with mortgage payments after the policyholder’s death.
Thinking of Purchasing Life Insurance?
An Alliance Income expert can help.
What Is Life Insurance?
Personal life insurance, which provides your survivors (beneficiaries) with money in case of your death, may on the surface seem similar to mortgage life insurance. Though both types of insurance exist to make certain that your heirs will not have a great financial burden, the mortgage life insurance only applies to paying off your mortgage loan on your house. On the other hand, personal life insurance policies provide money upon your death to your heirs, and they may each use that money in any way they choose.
This type of insurance generally aims to provide a lump sum for your survivors when you pass away, through payment of a death benefit. Death benefits are tax-free, and your beneficiaries can use the money for anything they wish. Yes, they may use it to pay off your mortgage if you did not have mortgage insurance, but alternatively, they may choose to sell the house and invest the life insurance payment (and the proceeds from the house sale, if any) elsewhere.
You’ll find many variables in differing kinds of personal life insurance policies in terms of eligibility, how long they extend, and the rates you’ll pay. In Canada, life insurance products are divided into categories based first upon the length of time they cover: either for a fixed term or for your whole life (permanent). These categories also vary in that permanent policies build up cash value. Depending on your age, the reasons for purchasing life insurance may vary as well. A 20 year old has different financial priorities and responsibilities then a 60 year old.
Term Life Insurance
Term life insurance policies are generally less expensive, but they do not build cash value that you can borrow against or draw down, and they come to an end either after a set number of years or when you reach a predetermined age. After that time, you will receive no benefits (and have no investment), although some are renewable for another term. Term policies generally require a medical exam or health questions, and premiums are based upon age, health, lifestyle practices, and statistical life expectancy, among other factors.
Couples are also eligible for joint term insurance policies. These come in two types, with the first being less expensive but having more limitations:
- Joint first-to-die term insurance insures both partners with the same coverage under one joint policy, but pays the death benefit upon the first partner’s death. In most cases, the surviving partner will need to apply for a new policy at that time.
- Joint single-term insurance issues an independent policy to each partner, with no requirement for the same amount.
Permanent Life Insurance (Whole Life and Universal Life)
Permanent life insurance policies, such as whole life and universal life, serve both as life insurance and as investment vehicles. First, as life insurance, they cover you for your entire life and do not expire as long as policies are paid. Premiums remain the same and do not increase with age. As they earn cash value, if you cancel your policy and the value of the policy exceeds the amount you paid in premiums, you can get cash back.
Also, many such policies will issue loans from the balance of your investment or allow you to use the amount in the policy as collateral for a loan elsewhere.
Universal life insurance policies include an investment account that allows for both withdrawals as well as loans. Since you can manage the investment of your premiums, the cash value (and death benefit) may increase or decrease depending on the investment returns. As a general rule, life insurance can be used as an investment vehicle, however this requires careful consideration into your own personal finances.
Learn even more about the different types of life insurance in this article.
Mortgage Life Insurance vs Personal Life Insurance
As we’ve explained above, many different types of insurance products exist to protect various parties (either lenders, with mortgage loan insurance, or a borrower’s heirs, with both mortgage life insurance and life insurance).
In considering mortgage insurance vs life insurance, you’ll need to determine which product(s) will be more beneficial for your lifestyle. These financial decisions are ultimately up to you and depend entirely on the circumstances in your life.
Are you ready to see quotes on the products that will help you protect your interests? Our team at Alliance Income is prepared to help you compare insurance products at affordable rates. Fill out our quote form today for more information.