While the inner workings of auto, property, and travel insurance may not be that simple, it is easy to know at a glance what they are for. However, the same cannot always be said for mortgage and life insurance, for a couple of reasons. Mortgage and life insurance are not as commonly discussed as other forms of insurance, and they are geared to a more specific group of people. To help you know the difference between the two, and which form of insurance may be more right for you, we broke down what both mortgage and life insurance actually entail.
Being a homeowner is expensive, and unfortunately, getting a mortgage or life insurance is just another added expense. It is, however, an expense that is highly recommended. Both mortgage and life insurance are there to help make things easier for your loved ones in the unfortunate event that something happens to you. If you pass away, your mortgage or life insurance will pay off the remainder of your mortgage, so it is not left for your family to pay. Both mortgage and life insurance do this, however, they do so somewhat differently.
Mortgage insurance – Right off the bat, mortgage insurance proves that it can be a bit confusing to understand, as it goes by a couple of different names. While it is most commonly known as mortgage insurance, the terms mortgage life insurance and creditor insurance are also used to describe the same product.
You are able to acquire the insurance through the financial institution you receive your mortgage from, typically with only having to answer a few medically relevant questions. The policy works on a term basis, so if you have a 30-year term mortgage, you would get a 30-year term insurance policy. The payments for the insurance are often worked into the cost of your monthly mortgage payments.
When you obtain your mortgage insurance policy your rates are fixed for your entire term, so if you are paying $50 a month for your insurance, no matter what the bank raises their rates too, you are locked in. However, as your mortgage is paid off and shrinks, so does the insurance payoff, should there be one. In addition, the money from the payout must be used to pay off the remainder of the mortgage.
Life insurance – Life insurance can also be referred to as term life insurance and works a little differently than mortgage insurance in how it covers your home after your passing.
Instead of getting your insurance policy through the financial institution you received your mortgage from, you would get it from an insurance broker. This avenue requires a more in-depth look at your medical history in order to apply for coverage.
When you purchase a term life insurance policy, you do so for the cost of your mortgage, and unlike a locked rate with mortgage insurance, your rate can change throughout the term of your life insurance policy. Which means it can fluctuate from time to time. But, your payout remains the same. So, whatever amount you were approved for when you got the policy is what will be paid out, no matter how long goes by and how much of the mortgage is already paid off. On top of this, the money from the payout does not need to be exclusively used to pay off the remainder of the mortgage; it can be used as your family sees fit.