Mortgage Insurance vs. Life Insurance: Which One Should You Choose?

When you take out a mortgage, your lender will almost always offer you mortgage insurance. But there is an alternative that is often more advantageous: personal life insurance. Here is how to tell them apart and make the right choice for your family.

What is mortgage insurance?

Mortgage insurance pays off the balance of your loan to the bank in the event of death (or sometimes disability or critical illness). The beneficiary is the bank, not your family. The insured amount decreases over the years, along with your mortgage balance, while the premium generally stays the same.

What is personal life insurance?

Life insurance pays a benefit to your named beneficiaries — your spouse, your children. They decide how to use the money: pay off the mortgage, replace income, fund education. The benefit amount stays level for the whole term of the contract.

The key differences

• Beneficiary: the bank (mortgage insurance) vs your family (life insurance).
• Benefit: decreases with the loan balance vs stays level as you choose.
• Portability: mortgage insurance is tied to the loan; life insurance follows you even if you change homes or banks.
• Pricing: mortgage insurance is often issued without detailed medical underwriting, which can make it more expensive if you are healthy.

Which one should you choose?

Many families choose personal life insurance: it offers more flexibility, a level benefit, and a beneficiary who is your family. Mortgage insurance can be a useful complement or suit particular situations. Most importantly: compare before signing, because once mortgage insurance is accepted, it can be difficult to replace later if your health changes.