What exactly is the difference between life and mortgage insurance?
We get this question often. Many of our customers are new families and have heard or already purchased mortgage insurance with their house, however the distinction between mortgage insurance and life insurance can be a bit blurry. In this post, we will explain the main differences and clear up some common misconceptions. If you’d like to speak to one of our brokers, you can contact us anytime.
First let’s establish what mortgage insurance is. When a young family looks to purchase their house, they’ll often need to take out a mortgage to pay for the difference between the price of their home and their down payment. This is their mortgage amount. Most mortgage companies and brokers will often try to sell you a mortgage insurance when you get approved for your mortgage. This mortgage insurance is meant to protect you in the event that you’re unable to pay off the remaining balance of your mortgage. It’s basically insurance for your mortgage. The important part here is that mortgage insurance is mainly aimed at protecting your mortgage balance.
So to recap:
The trigger: mortgage insurance kicks in IF you default on your remaining mortgage amount.
The purpose: Mortgage insurance covers remaining mortgage balance.
How Life Insurance Differs from Mortgage Insurance
The purpose and aim of life insurance is a bit different (broader) than mortgage insurance. Life insurance is a product that is created to protect an individual from financial liabilities in the event of unexpected death. Without life insurance, if a spouse dies their outstanding liabilities are transferred to the surviving spouse. This means any mortgage debt AND other forms of debt including but not limited to car loans and personal loans are now shouldered by the surviving spouse. Life insurance is a product that’s created to protect you from this additional financial burden. By paying a monthly premium, your life insurance will write off any of your outstanding debt up to the amount of coverage you purchased. The key focus is here is that life insurance covers not just mortgage debt, but also other forms of debt. So it provides a broader range of protection and is generally a better product for people who are looking to buy more complete financial protection.
Trigger: Life insurance proceeds get dispersed to your beneficiaries when you die.
Purpose: Life insurance covers ALL financial liabilities.
In conclusion, life insurance can cover (and replace) mortgage insurance. However mortgage insurance CANNOT cover and replace life insurance. Life insurance provides greater coverage and protection whereas mortgage insurance is a special niche insurance that only covers mortgage payments.
An Example of Life vs Mortgage Insurance:
Brian and Ellie are starting a family, and they found a beautiful home in Toronto for 500k (they really lucked out!). They put down a 100k down payment and took on a 400k mortgage from a reputable bank. In addition, they recently purchased a used car for 25k and paid down some of Ellie’s student loans for 15k.
Their total liabilities are:
Car loan: 25k
Personal loan: 15k
If they only had mortgage insurance:
In the event that they both lose their jobs and can’t pay their monthly mortgage payments, their mortgage insurance will be able to cover their mortgage liabilities. However Ellie and Brian would still be left with their car and personal loans of 40k.
If they only had life insurance:
In the event their one of them unexpectedly passes away, the remaining spouse would be able to call upon the life insurance to cover ALL 440k of their liabilities (assuming their coverage is 500k and enough to cover it).
This illustrates that life insurance is in general a broader and more reliable protection product against financial ruin, whereas mortgage insurance is a specific type of financial insurance.
If you have any other questions or would like to speak to one of our experienced brokers, please feel free to contact us.