Life Insurance Vs. Mortgage Insurance: Let’s Break It Down
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July 27, 2023
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Life insurance can be a necessity for ensuring your loved ones are taken care of after you’re gone. It can help them pay for funeral expenses, the costs of everyday living and much more. But one of life insurance’s main advantages is that it can pay off outstanding debts, including a mortgage. So which is a better consideration, life insurance or mortgage insurance?
There are vast differences between what these two types of coverage can do for you and your family. Be sure to talk with Statera Financial Planners before you ever commit to one over the other.
Individual Insurance (Includes term and whole life policy options)
Who receives the money?
- You decide who receives the money as a beneficiary, and they get to decide how to use it. Choices could include paying funeral costs, paying down the mortgage or other outstanding debts, funding education needs or retirement plans.
How long does my coverage last?
- You choose – it can be short-term or for a lifetime. And regardless of whether you pay down your mortgage or not, your coverage amount is not affected by the outstanding balance.
How much choice do I have?
- You can choose from several types of insurance including term or whole life insurance (see previous weeks posts for a breakdown of what each type of insurance does). Each type has options that can be customized for you and your family's needs.
Who controls the policy?
- You do. That means you can make changes to your beneficiary details at any time, and move your mortgage to a different lender without affecting your insurance.
What happens when I pay off my mortgage?
- You’re still covered. Your individual insurance isn’t tied to your mortgage so your coverage stays with you.
When does underwriting occur?
- Individual coverage completes a full medical and lifestyle underwriting at the time of application. This means the carrier is aware of all personal risks in advance of offering coverage. Once an offer is presented and accepted, they cannot cancel coverage or deny the claim1. This means you have great peace of mind knowing your family will receive the amount you have been paying for, month after month.
Mortgage Insurance
Who receives the money?
- The money goes to the mortgage lender and they use it only to pay off your outstanding balance upon death.
How long does my coverage last?
- Mortgage life insurance only lasts until you’ve paid off your mortgage. And you’re typically only covered for the balance of your mortgage. So, as you pay down your mortgage, your coverage decreases, but your monthly cost stays the same.
How much choice do I have?
- Your options are limited. You typically can’t make changes based on your evolving needs or make the coverage last a lifetime.
Who controls the policy?
- The lender does. That means you can’t change the beneficiary or move your mortgage insurance to another lender without impact to the coverage. If you find a better mortgage rate with a different lender, you may have to reapply for mortgage insurance with the new lender. This could increase your costs.
What happens when I pay off my mortgage?
- Your insurance coverage ends.
When does underwriting occur?
- Policies are post claim underwritten, meaning after you pass away the carrier will review your case and if there was any reason they wouldn't have insured you on day one, they do not pay out the claim to cover the outstanding mortgage, instead simply refund the premiums. This may not be helpful to your surviving family, especially if they can no longer afford the ongoing mortgage payments.
1 Insurance carriers cannot deny a claim unless falsified information was provided during the application or the cause of death was suicide within the first two years of policy existence. Always be sure to read your policy contract thoroughly for the clauses and stipulations of your insurance coverage.
As financial planners, we do not provide specific tax and legal advice. You should always consult your accountant and/or lawyer where necessary. Because of the many ways a strategy may be impacted when segmented, we prefer to communicate collectively with your external professionals to ensure that all recommendations and action plans are in the overall best interest of you, with your professionals working with common goals in mind.
You are never obligated to act on our recommendations of products, services, or advice.