Interest rates in Canada have risen, and there’s no guarantee they won’t rise again in the future. That's why when it comes to important purchases like your home, you’ll want to know that if you pass away, your mortgage will be paid.
Two ways you can do this are with mortgage life insurance and term life insurance. Knowing the differences, and the advantages and disadvantages of each, can help you make the right choice. As Engineers Canada and affinity partner Manulife celebrate the 75th anniversary of the Engineers Canada-sponsored Term Life Insurance Plan, Manulife explains the differences between mortgage life insurance and term life insurance below.
Understanding mortgage and term life insurance
Mortgage life insurance is an insurance policy generally offered by the lender, that pays off the mortgage should a borrower pass away while the principal on the mortgage loan is still outstanding. The borrower pays a fixed premium payment to cover a reducing mortgage debt until the mortgage balance is paid.
Term life insurance is an insurance policy offered by insurance companies to protect the borrower through the term of the policy and upon renewal. Policy amounts can be tailored to protect the mortgage and can be used to help cover many other needs. The benefit is not subject to tax and received as a lump sum amount. There are a range of policy terms to choose from, such as five-, 10- or 20-year terms.
The differences between mortgage and term life insurance
Beneficiaries: With term life insurance, the policyholder decides on the beneficiary(ies). With mortgage life insurance, the beneficiary is the mortgage lender. Your lender receives the life insurance payout, not your loved ones.
Medical tests: With term life insurance, medical underwriting occurs at time of application, which is why sometimes a medical exam is required. Medical underwriting happens before a claim is ever made. On the other hand, with mortgage life insurance, there is usually no medical exam required at time of application. Medical underwriting happens after a claim is submitted. While this may seem convenient, it may result in your claim being denied later if you have health issues.
Portability: Term life insurance is portable. That means it goes with you, whether you move, pay off your mortgage, or change your mortgage lender. But mortgage insurance is tied to your mortgaged property and if you sell your home, pay off your mortgage or change lenders, your coverage ends.
Payouts: With term life insurance, your benefit remains the same and never changes. However, mortgage life insurance only covers your remaining mortgage balance. Although your benefit decreases as your mortgage balance goes down, your premium cost doesn't decrease.
Flexibility: With a term life insurance plan, your family or beneficiaries can use the payout any way they want. Mortgage life insurance can only be used to pay off your mortgage.
Length of coverage: Mortgage life insurance ends when your mortgage is paid off or you move to a different lender. Term life insurance can often be extended or converted to another policy when your term is up.
Whether you choose term life insurance or mortgage insurance to protect your home and your family, knowing the pros and cons of each can help you make the right choice. The right choice for you may be Engineers Canada-sponsored Term Life Insurance.
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