What’s the best way to protect your investment in case something happens to you?
Anyone considering home ownership understands that buying a home is a huge step toward financial security—and it’s one of the most important investments you’ll ever make in your life. Many people don’t have the financial capital available to purchase property outright, so they often seek assistance from a financial institution to procure the additional funds they need.
In order to qualify for this type of loan, lenders usually require borrowers to have some form of mortgage life insurance in place. This insurance acts as a safeguard for the lender by guaranteeing they will get their money back should the worst occur, which, in turn, lowers their risk when loaning a considerable amount of capital to you.
Mortgage life insurance is designed to step in and pay the balance of a homeowner’s mortgage debt if they suffer an untimely death. Although this serves mainly to protect the lender, it does allow the homeowner’s family some reassurance. For instance, if the mortgage holder is the main breadwinner in the family, their death could wreak havoc on their family’s financial stability—and their ability to stay in the home they love.
So, what’s the best way to protect your investment in case something happens to you? Well, there are two types of mortgage life insurance for you to consider:
- Decreasing Term Insurance, also known as Mortgage Protection Insurance (MPI)—where the amount of coverage decreases as you repay your loan, matching the outstanding balance of the mortgage, until both reach zero.
- Traditional Term Life Insurance—where the amount of coverage remains the same for the duration of the coverage period you choose.
Both Mortgage Protection Insurance and Term Life Insurance have their own unique benefits and drawbacks. Understanding the difference between the two will help you make the best decision for your family.
The Benefits of Mortgage Protection Insurance:
- Even if you’re in poor health or work in a dangerous profession, approval is guaranteed with no medical exams or lab tests required.
- The payout goes directly to your lender to clear the remaining mortgage balance—your family won’t have to take on your mortgage payments when you die.
- Some MPI policies remain in force (usually for a limited time) if you become disabled or lose your job.
The Drawbacks of Mortgage Protection Insurance:
- The policy pays off your mortgage, but nothing else—your family won’t receive any of the proceeds from this coverage.
- Coverage typically costs more than Term Life Insurance—especially for healthy adults—even with the premium amount due decreasing over time.
The Benefits of Term Life Insurance:
- Term Life Insurance can be very affordable.
- The coverage amount you choose, and the associated costs, will remain the same throughout the entire term of coverage.
- Your family can decide how to use the funds—whether it’s to pay off the mortgage balance, or for something else like replacing your lost income or covering your funeral expenses.
- As your mortgage balance decreases, the difference between your death benefit and the amount you owe to your lender would be paid to your family—allowing them to address their other financial needs as well.
The Drawbacks of Term Life Insurance:
- Approval isn’t guaranteed. Most people may qualify for coverage, but the cost may be higher for individuals with health or employment risks.
- Coverage isn’t coordinated with your mortgage—unless you specifically assign the initial payment to go to your lender, your family will be responsible for paying down the balance of your mortgage once they receive the proceeds from your policy.
The bottom line is that Mortgage Protection Insurance protects your lender more than your family—and at a higher cost—whereas traditional Term Life Insurance is usually a more affordable option if you’re in good health, and it’s the more flexible one since it’s designed to pay off your mortgage and leave a portion of the benefit to your chosen beneficiaries.
Even so, for those who may struggle to qualify for traditional Term Life Insurance, MPI could provide an important solution that might not otherwise be available to you—and, the extra cost may be worth it.