Glossary - Letter - M

What is Mortgage insurance? Mortgage insurance is an insurance that pays for your mortgage if you cannot pay due to issues such as disability critical illness. You can think about it as a purpose-linked insurance that only covers your outstanding mortgage debt to the bank. In most cases, getting a life insurance instead is a much better option.

There are numerous reasons why many financial experts recommend life insurance instead of mortgage insurance. Here is an overview of the most important things to know:

  1. Beneficiary: If you get mortgage insurance, the beneficiary will be the bank as opposed to life insurance where your family can be the beneficiary.
  2. Post-underwriting: Mortgage insurance is a post-underwriting product as opposed to life insurance, which is underwritten prior to being put in force. Post-underwriting basically means that an insurer will only check  to see if you were telling the truth on your application in the case of a claim. Claims are typically very vague in their formulation, and the insurer keeps the right to decline your coverage. In case of life insurance, once you are approved for insurance, you are protected.
  3. Capped coverage: Mortgage insurance can have a cap, e.g. $500,000, that might be not enough to cover the mortgage. Life insurance coverage can be significantly higher.
  4. Switching home or banks: Life Insurance always stays with you whereas mortgage insurance can be cancelled if you change a property or bank.
  5. Pricing: Mortgage insurance is often more expensive than term life insurance for the identical coverage. Mortgage insurance premiums do not change even if you have almost paid off your mortgage and when there is nothing to insure. Premiums will stay the same.
  6. Being in great health: Mortgage insurance does not offer any benefits whereas life insurance does, and your rates can go down by additional 25%.
  7. Paying off the mortgage: Once your mortgage is paid off in full, your mortgage insurance is terminated whereas life insurance will stay in place.

Overall, if you decide to go for a mortgage insurance policy, you are getting a limited coverage with numerous constraints and uncertainty. Should you decide to go for a life insurance, the protection is more solid, coverage is higher, and can be used towards multiple purposes such as paying off your mortgage, outstanding loans, substitute income, and more.

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