What’s the Difference Between Mortgage and Term Life Insurance?

What’s the Difference Between Mortgage and Term Life Insurance?

Canadians need to know what’s the difference between mortgage and term life insurance for numerous reasons. The home is part of an individual’s biggest investment; therefore, steps must be taken to pay for the mortgage when either family member dies.

To solve this issue, you could opt for term life insurance and mortgage insurance.

So, what’s the difference between mortgage and term life insurance? The differences between these insurance policies include the number of beneficiaries allowed, the type of medical exam taken, the renewal process, flexibility, and coverage.

Also, there are differences in who handles the documentation and the cost implications. The policy you choose between these two will depend on your budget and needs.

This guide will answer the question: What’s the difference between mortgage and term life insurance? You will also understand the benefits and drawbacks of each policy.

What’s the difference between mortgage and term life insurance?

In this What’s the difference between mortgage and term life insurance section, we will discuss what separates these two concepts.

Beneficiary

One significant difference between these two terms is how the beneficiary is chosen. If you take term life insurance, you choose and can replace who becomes your beneficiary.

 However, the lender is the sole beneficiary for mortgage insurance should you die. This means the mortgage lenders get a payout, not your loved ones, once you die.

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Medical tests

With mortgage insurance, you don’t need to take a medical exam before it is approved. The downside is that once you forget something, it can affect your claim in the future.

However, many lenders require you to take a medical test before you complete the mortgage insurance. This makes it secure, and your coverage is assured in the future.

Renewal

When you register for 10 to 20-year term life insurance, you must pay your monthly premiums when they are due. But this isn’t the case with mortgage insurance; when you renew, your premiums will likely change to a higher level.

Portability

The portable feature of term life insurance makes it ideal for people who might change lenders later. You can easily transfer your insurance to your new lender when you do. But mortgage insurance is tied to your home and only applies to that.

The coverage elapses once you sell the house and pay off your debts.

Coverage

If you have term life insurance, your payout remains unchanged until the end. With mortgage insurance, the payout decreases as your mortgage reduces. What this implies is that the payout with a mortgage is smaller as the duration continues.

Flexibility

Term life insurance offers more flexible plans than mortgage insurance. Your family can use the benefit as they see fit. However, mortgage insurance is ideal for paying off mortgage debts and nothing else.

Expertise

With term life insurance, you work with a licensed insurance agent who is certified. It doesn’t matter if they are online or offline; this advisor must be licensed. But when you purchase mortgage insurance, it’s through a financial institution’s staff.

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About mortgage insurance

Mortgage insurance is an insurance policy that protects a lender or titleholder in the event of a default. A default can happen when the borrower stops payment or when he dies. It is an obligation to compensate the lender in some instances of loss.

However, mortgage insurance is not the same as mortgage life insurance. The latter protects an heir when the borrower walks away without fulfilling his obligation.

How does mortgage insurance work in Canada?

Information about the difference between mortgage and term life insurance will be more apparent when we know how it works.

This policy comes with a pay-as-you-go payment structure or a lump sum in Canada. The option you choose depends on you and your spouse. The CMHC regulates how this and different mortgage policies operate in the country.

Types of mortgage insurance in Canada

You need to understand the types involved to know what’s the difference between mortgage and term life insurance. For mortgage insurance, they include:

Private mortgage insurance

Personal mortgage finance (PMI) is a mortgage insurance type that a borrower must buy conditionally. With this mortgage insurance, you may be asked to get it as a condition of a conventional home loan. This type of loan protects the lender rather than the buyer.

It is a mortgage policy provided by Canada’s best private insurance companies. A borrower who makes a downpayment of about 25% when getting this insurance might be asked for this insurance policy. You might also need a PMI if you are refinancing a traditional loan and the equity is lower than 20%.

Qualified mortgage insurance premium

When you get a federally backed mortgage in Canada, you must get a qualified mortgage insurance policy. The rules guiding a MIP application differ across lenders, irrespective of your down payment.

Mortgage title insurance

Mortgage title insurance protects you from loss should a sale be invalidated in the future. This coverage only applies when the deal doesn’t go through if the problem is with the house’s title. During a home sale, if it is discovered that the home is for someone else, you are protected.

Before a house is sold, a representative or title company staff makes a title search. This is necessary to uncover if there are any liens on the home. Also, a title search helps verify if the property belongs to the seller.

Mortgage protection life insurance

Lenders are often asked to take an MPLI when they start a mortgage application. Although you can decline this, you will be asked to sign many forms and documents because of this. These waivers are for understanding the risk of taking a mortgage.

Payouts for this mortgage can either be level or declining. You can receive payment or indicate an heir, depending on the terms.

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Advantages of taking mortgage insurance

If you want to learn the difference between mortgage and term life insurance, know how it benefits you. Here are some pros of this insurance policy:

Easy application

The process of applying for mortgage insurance is simple in Canada. The criteria to qualify aren’t stringent; you can complete them within a few days.

No medical exam is required

Taking mortgage insurance doesn’t require you to write a medical exam. So, this insurance policy is for you if you prefer to avoid health exams or have health challenges.

Free up money

This insurance policy can free up some cash from other insurance policies. Funds you generate via insurance, such as employer benefits or life insurance, can be used for other expenses. You could pay for travel, medical care, or child tuition fees.

Disadvantages of taking mortgage insurance

Here are some drawbacks to getting this insurance:

Expensive

Mortgage insurance is usually more expensive than other premiums based on your age. Also, the insured amount and lender tend to affect the cost of this policy.

Rates are complicated

There are no fixed premium rates for mortgage insurance. The premium rates are charged yearly based on economic and fiscal decisions.

Non-transferable

Unfortunately, when you pass on, your beneficiary can enjoy any premium from this policy. This is not ideal for people with health risks or old age.

About term life insurance

Term life insurance is a policy that guarantees an insurer beneficiary will receive a payment upon your death. This type of policy doesn’t have much benefit other than a specified financial payment to a named heir. This policy premium is calculated based on several factors, which include:

  • Life Expectancy
  • Health
  • Age
  • Finances

Also, depending on your insurer, you can change term life insurance to whole life insurance. The duration of a term life insurance policy ranges from 5 to 10, 15, or 20 years and above. You could also renew it when it expires.

How does term life insurance work in Canada?

To get a clearer picture of what’s the difference between mortgage and term life insurance, you should know how it works. If you talk to the right insurer, there are affordable life insurance quotes in Canada. When you apply for this policy, the insurance firm determines how premiums will be paid. In exceptional cases, you might be required to take a medical exam before the policy can be approved.

You might be asked to provide your driving records, hobbies, family history, and smoking habits. If peradventure occurs during the policy term, the company will compensate your beneficiary with the policy face value.

Usually, this cash benefit is not taxable; however, you need to contact the Canada Revenue Agency for more information about this. The recipient of this cash benefit can use the funds for burial arrangements, debt payment, and offloading debts.

If the term life insurance expires before you die, there won’t be any payout. The next option in this scenario is to renew the term policy; however, premiums will be reviewed based on your present age.

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Categories of term life insurance in Canada

Term life insurance policies come in various types in the country. You will make your choice based on your preferences. They are:

Level-term policy

A level-term life insurance policy comes with a fixed monthly payment. This is the most common type of term life policy you can get in Canada. The duration of this policy ranges from 10 to 30 years. Actuaries incur several costs during the life of this policy, which is why this insurance type is more expensive than others.

Yearly renewable term policy

The YRT policy is a year-long policy that can be renewed without showing proof of insurability. The premiums for this policy rise annually as the policyholder ages. It is an ideal option for people who require temporary insurance.

Decreasing-term policy

This life policy type comes with a death benefit that declines annually. It is based on the predetermined schedule the insurer and lender agreed upon. You are expected to pay a fixed premium throughout the policy.

Advantages of term life insurance

This type of policy comes with certain benefits. They are:

Cheap

This policy is more cost effective than others. This attracts many Canadians; however, the price is based on individual insurers.

It helps cover expenses

This type of insurance can help cover mortgage payments, mortgage insurance, or burial fees. It comes with a cash payment, which your beneficiary can use to offset specific bills upon your death.

Renewal process

Most Canadian insurers allow you to renew your term life insurance automatically. This helps you avoid the tedious process of renewing an insurance policy. Talk to your insurer to see if it’s possible.

Disadvantages of term life insurance

Here are some cons of this insurance policy:

No cash value

This insurance policy doesn’t have a savings feature where you can borrow or withdraw anytime. It is given to your beneficiary when you pass it on.

Constraints with age

While the maximum age limit you can apply for this policy varies, it constrains senior citizens older than 65. Some insurance firms place limitations on certain elderly citizens when processing this form. It’s best to apply early.

Increase in premium

When you renew this policy, the premiums also jump up. It doesn’t take into consideration your present financial situation.

Conclusion

This guide has answered the question about what’s the difference between mortgage and term life insurance. We have discussed extensively how both policies work in the country and their cost implications.

Also, the merits and demerits of each have been stated to help you make the best decision. Using a reliable insurance firm that will understand your needs and deal with them appropriately is essential.

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FAQs about what's the difference between mortgage and term life insurance

Which one is better, term or life insurance?

Both insurance concepts have their strengths and weaknesses. If you take term insurance, you will get tax savings; whole life insurance offers maturity and survival opportunities.

What is the difference between life insurance and mortgage life insurance?

The primary difference between the two is that life insurance has a determined duration. In contrast, mortgage life insurance lasts throughout your lifespan. Other differences are cost, application process, and premium payments.

Can you cash out term life insurance?

It's impossible to cash out term life insurance because it doesn't have a cash value feature. This insurance policy is mainly a death benefit that your family may collect when you die.

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December 2, 2023
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