If you have a mortgage, then you should have some kind of insurance in place to pay it off just in case you die while the mortgage is outstanding. My suggestion*** is that you get a life insurance policy that is sufficient to cover the full amount of your outstanding mortgage. This way, the life insurance can be used by your named beneficiary to pay off the mortgage debt in the event of your death.
In Canada, there is a product called mortgage insurance. While I am not in any way, shape or form an insurance expert, I would urge you to get a life insurance policy instead of a mortgage insurance policy.
If you have a life insurance policy worth $750,000 and a mortgage worth $350,000, then the full $750,000 is paid out to your beneficiary to use as they see fit after your death. Your beneficiary can choose to pay off the mortgage and to pocket the remaining $400,000. Your beneficiary can choose to take over the mortgage payments and put the $750,000 towards some other goal. You don’t really care what your beneficiary does since you’re dead. What you care about while you’re alive is the fact that the life insurance policy will pay out its face-value. Presumably, you care that your beneficiary is put in a position to continue to live in her or his home upon your demise so that’s why you’ve obtained an insurance policy that will be sufficient to pay off the mortgage on that home. (If you don’t care where your beneficiary lives after you die, then there’s really no need for either type of insurance unless you simply have a deep and perplexing love of paying insurance premiums.)
If you have a mortgage insurance policy, then your beneficiary will be the lender who hold your mortgage. The mortgage insurance policy will only pay out the necessary amount to cover your mortgage at your death. If you die when your mortgage is $350,000, the the insurance policy pays the bank $350,000 because the bank is the beneficiary. Let’s say that you you die near the end of the mortgage and your mortgage balance is only $7,500, then the bank gets $7,500 as the beneficiary of the policy.
If your intent is to have the mortgage paid off after your death, then life insurance is superior to mortgage insurance.
With a mortgage insurance policy, you do not get to choose the beneficiary. If you should pass away when you have children who still need to be raised and educated, a life insurance policy is a better vehicle by which to provide money for their future financial needs. The mortgage insurance policy only ensures that they can stay in the home, but there is no additional money set aside for post-secondary expenses, extracurricular activities, weddings, or any of the other experiences that you, their parent, would have liked to have given them.
Secondly, life insurance premiums will buy you the same amount of coverage for the life of the policy. If you’re paying $5 per month for life insurance, then you are getting $750,000 worth of insurance no matter when you die during the life of that policy. Your beneficiaries will get $750,000 whether you die one month after buying the policy or whether you die 3 days before the expiration of the policy.
With a mortgage insurance policy, you pay the same monthly premium for a decreasing amount of coverage. In effect, the mortgage insurance policy’s premium gets more expensive as the mortgage balance goes down. Again, assume that the premium is $5 per month. At the start of the mortgage, you’re paying $5 to cover the full mortgage balance of $350,000. Near the end of the mortgage, you’re still paying $5 but, should you die, the mortgage insurance policy will only pay out the very small amount owing on the mortgage debt.
Dollar for dollar, you are purchasing more insurance coverage for your life’s expenses with a life insurance policy than with a mortgage insurance policy.
Few people like to think about their deaths, which is understandable. However, the fact remains that people die and they leave dependents behind. The responsible and kind thing to do for your dependents is to ensure that they don’t have to worry about where they will live as they struggle to rebuilding their lives after you’re gone. One of the most loving things that you can do for your dependents after your death is to ensure that their overwhelming grief is not compounded by financial worries.
*** I am in no way, shape or form an insurance expert. This blog post reflects my personal opinion, which is based on my life experience. Insurance is a very complicated product so if you decide to purchase insurance, please get an unbiased opinion from an insurance expert.