Insurance to protect your debt
Are you thinking of purchasing a home? You may be offered the option to purchase mortgage protection insurance by your bank or mortgage lender. If you already own a home, you might already be paying for mortgage protection insurance. You can confirm if you have existing coverage by checking your mortgage statement.
But what is mortgage protection insurance? How does it differ from traditional term life insurance? And do your really need it if you are self-employed?
Mortgage Protection Insurance
Mortgage Protection is insurance that is often purchased by a homeowner at the time they purchase a home and finalize the mortgage. With this type of insurance, the lender is the beneficiary, and will receive the death benefit from the insurance policy should the homeowner unexpectedly pass away.
The death benefit is usually the outstanding mortgage amount. The term, or length of the policy, is usually tied to the mortgage term, or the length of time that the mortgage contract is in effect.
When it comes to mortgage protection, a homeowner may be mandated to purchase it from certain financial institutions. This is usually the case if the homeowner does not deposit the requisite 20% on a home.
Term Life Insurance
Life insurance isn’t a required purchase like mortgage protection can be for select homeowners. For this product, the policy owner chooses their beneficiary. In case of unexpected death, the beneficiary may choose how to use the death benefit, or the proceeds of policy. The death benefit can be used to pay off a mortgage, but also to fund education of children or pay off other pending debt.
The cost of life insurance depends on the death benefit. Usually, if the death benefit is higher, the monthly or yearly premium cost will be more expensive. The death benefit can be calculated by considering a wide range of factors, including any outstanding mortgages or debts, yearly compensation for any dependents, lost income, future education costs, etc.
This makes term life insurance coverage much more comprehensive, because it can cover all of your debt, beyond your mortgage. It can also cover future expenses and subsidize any lost income that results from unexpected death.
Differentiating Between Mortgage Protection and Life Insurance
There are many other differences between mortgage protection and life insurance that you should understand before choosing the insurance product that is best suited to your needs:
Which policy should you purchase if you are self-employed?
While each situation is different, be mindful that if you are about to be a first-time homeowner or paying less than a 20% deposit, the lender may require the purchase of mortgage protection regardless of your preferences.
But if you have a chance to opt out of your mortgage protection insurance, you can purchase more comprehensive, and affordable, coverage through a term life insurance policy.
If you are self-employed, this coverage is critical, since you have taken on a large debt like a mortgage. You do not want to leave your loved ones responsible for that debt, in case anything were to happen to you.
If you are self-employed, you likely do not have any life insurance coverage through employer provided benefits and are solely responsible for funding your own insurance. It might make sense to go with a term life insurance policy, which is the cost effective option.
The bottom line
If you aren’t mandated to have mortgage protection, a personal life insurance policy is a much better option as it is cheaper, more flexible, and allows for beneficiaries to decide how best to spend the payout.