Of Prime Interest: Why to insure a mortgage

The beneficiary of mortgage insurance is the lender where the mortgage is held…

  • Dec. 16, 2015 6:00 p.m.

Do you know the difference between life insurance and mortgage insurance? Mortgage insurance is unique from life insurance in several ways, and you need to consider those differences when making a decision about what form of those two insurance opportunities will work best for you.

The beneficiary of life insurance is whoever you chose—your surviving spouse, your estate, your children or your parents. The value of the policy is paid to your beneficiary and can be used for any purpose including paying off the mortgage.

The beneficiary of mortgage insurance is the lender where the mortgage is held so the funds go directly to the lender and the mortgage is paid off. There are no excess funds to pay bills going forward.

The face amount of a life insurance policy is the amount your beneficiary receives and the premiums are based on the amount of the insurance, your age and your health.

For mortgage insurance, the face amount of the insurance is the mortgage amount owing. What this means is you are paying the same monthly premium for years on a declining mortgage balance.

If you are accelerating your payments or making lump sum payments on your mortgage, the amount is declining even quicker.

Mortgage insurance is typically more expensive than life insurance as it is in most cases offered without a medical check requirement. Rates are based on the average health of the age group being insured. The application process occurs after death and not at the time of the approval.

If the insured had any pre-existing health conditions or just existing conditions at the time of the application, a life insurance claim may be rejected.

Another issue with mortgage insurance is if you decide to move your mortgage from one lender to another, the mortgage insurance is automatically cancelled, causing you to have to requalify with the new lender. You will be older and as we age premiums increase. With life insurance, your policy will remain in effect regardless of what you do with your mortgage.  .

Mortgage insurance is offered at a stressful and emotional time when you are making the biggest purchase of your life. The cost may seem minimal compared to the mortgage payment, but the life insurance option cost can be half of a mortgage insurance rate and provide more financial flexibility.

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