Taking out a mortgage is a big step. An average mortgage for a buyer is approximately $300,000. When you agree to take on that mortgage, you are agreeing to pay that money back to the bank for the next 25-35 years (plus interest) regardless if you are hurt, or deceased.
Mortgage life insurance vs term life insurance
What happens if you pass away? Your estate, or family, is still required to make those mortgage payments. One solution for your family, if you pass away, might be to sell the home and pay off the mortgage, however, this solution might not be ideal.
This is why people have mortgage insurance or life insurance. Your insurance will cover the costs of the mortgage if anything happens. If you are looking to protect your family if anything happens to you, there are two different types of insurance that you can have: Term Life Insurance and Mortgage Life Insurance.
Let’s examine the differences:
Mortgage life insurance
Pro: Mortgage gets paid in full
If you have mortgage life insurance and you pass away, the bank will pay off your entire mortgage. You will not receive any money, you will simply pay off what’s left of your mortgage.
Pro: Offered by your bank
Mortgage life insurance is usually offered by your bank when you take out a mortgage. Many people choose this option because it is very convenient to get your mortgage life insurance at the same bank that holds your mortgage.
Pro: Convenience of consolidation
The payments are automatically taken out at the same time and appear on your mortgage statement. However, your may be paying extra for that convenience.
Con: Only covers cost of mortgage
Some of the disadvantages of using mortgage life insurance is that the coverage will only insure the cost of your mortgage. So if the main income earner passes away, mortgage life insurance will pay off the mortgage, but it will not cover other debts or obligations, such as credit card debt or car payments.
Term life insurance
Pro: Covered for a specific cash amount
Term life insurance will cover a person for a certain amount of money if they pass away. You will receive a large sum of money and the insurance money can be used by the beneficiary however they choose.
Pro: You can use the payout as you please
If you have a $300,000 term life insurance policy, you can use that money to pay off some of the mortgage, car or credit card debt. This gives the beneficiary more options.
Pro: Term life insurance can be less expensive
According to Kanetix, if would be less expensive to obtain a $250,000 term life insurance policy compared to a $250,000 mortgage life insurance policy. The monthly savings could add up to more than $10,000 over the life of your mortgage, so to speak.