Mortgage Insurance Vs. Term Life Insurance

Mortgage Insurance

Mortgage insurance can be required by a lender to guard against loan default. Normally, lenders require that you carry mortgage insurance if you have less that 20 percent equity in the home when you initially take out the home loan, meaning you provide less than 20 percent of the purchase price as a down payment. If you fail to make mortgage payments, the mortgage insurer pays the mortgage on your behalf. This type of insurance benefits the lender, not the borrower. So you won't receive any money from the mortgage insurance company. The payment will be sent directly to the lender. Once you have accumulated at least 20 percent equity in the home, you can request that the lender cancel the mortgage insurance.

Term life insurance pays a benefit in the event of your death. Your family may use the money for any purpose. But when purchased in conjunction with a mortgage, it is normally used to pay off any remaining mortgage balance if you die before paying off the balance.

The benefit of carrying mortgage insurance is that you may be able to stay in your home. The mortgage insurer makes payments immediately after a claim is filed. As long as payments are made, you'll get to stay in your home. The bank won't foreclose on your property. The benefit of term life insurance is that the mortgage can be paid off immediately after you die, but the mortgage doesn't have to be paid off. This is because term life insurance pays a lump sum payment to your beneficiaries rather than the bank. The money may be used for any purpose.

The disadvantage to mortgage insurance is that it isn't cheap. The insurer must charge you for the risk of defaulting on your mortgage. Depending on your credit and the type of mortgage, the premium may be unaffordable for you. Also, if the claim for payment relief isn't filed immediately, and the mortgage company fails to make payments on your behalf, you could have your property repossessed by the bank. The disadvantage with term insurance is that it provides no benefit unless you die during the term of the policy. It does protect your family, but only if you die, not if you live and simply cannot make the payments.