If someone asked you what your biggest financial asset is, like most people, you would probably say it was your home, or perhaps some other large investment property. While in fact, financially on paper this may be true, in actuality, your biggest asset is really your ability to earn income. As simple as it sounds, this ability is what sustains the overhead costs in your life. Unfortunately, that human value is often underestimated and is at a greater risk because people don’t think of income-earning as a tangible asset.

Although, the average family home is in fact a substantial asset, it can only be fully owned by paying down the entire principle, which makes your mortgage payment probably your biggest long term liability. So it makes perfect sense to want to insure this liability in case something does happens to you.

Mortgage life insurance does that. At the time of death, it should pay out the outstanding mortgage balance. It is a term life policy that is designed to cover your mortgage if you pass away during the term. Many people accept the coverage as part of their mortgage contract and seemingly have peace of mind just in case, with the hopes of ensuring that the family left behind will be able to pay off their home debt and continue to live there.

I said “seemingly” because to truly get a better understanding of mortgage insurance, there are some important things you should know as it compares to an individual life insurance policy.

The first thing to understand is that mortgage insurance is designed to pay off the bank; therefore the insurance payout will be made directly to the bank and you have no control over it. With individual life insurance, you choose the beneficiary and it’s up to the recipient to decide what to do with the insurance proceeds as is most appropriate. There may be a need for money due to an unforeseen circumstance or other debts that need to be managed immediately. With the control of the life insurance proceeds, your beneficiary could decide to pay off all or a portion of the mortgage and use the remaining money to cover other expenses. Another possibility is that with today’s low interest mortgages, it could make more financial sense to invest the death benefit money rather than immediately pay off the debt to your mortgage.

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Furthermore, risk is assessed with individual life insurance, through an underwriting process, where your age, medical health history and exam will help to determine your coverage as well as your premiums costs. With mortgage insurance, it is usually not underwritten until a claim, which could mean technically you could be declared uninsurable when you submit a claim if the insurance company determines you are not eligible for a payout. For example, perhaps a claim may be denied because an investigation of your medical records indicates you have a medical condition that you did not disclose.

Finally, mortgage insurance usually means it is covering a decreasing amount. While your premiums remain the same the amount left on your mortgage normally decreases as you make payments. This further means that your premiums do not reduce as the mortgage is paid down. Mortgage insurance will only pay off the balance of your mortgage when you make a claim. In an individual insurance policy you pay premiums for a predetermined amount of coverage that is constant. This means your beneficiary will receive the full coverage and not a reduced amount.
Another point of interest is that if you renegotiate your mortgage or you move mortgages to another lender, you may lose your existing mortgage insurance and have to re-qualify for new mortgage insurance coverage. If you have had a change in health, you may be unable to qualify. As well, if you pay off your mortgage, you lose all your coverage. In contrast, individual term life insurance is personally owned in your control and not tied to your mortgage at all.

What often seems like a good idea can sometimes have much better alternatives. Discussing your financial objectives and protection should best be done with the help of an independent professional, such as a financial advisor. Income and debt protection is a crucially important part of the planning process to protect your family’s future. An advisor can help you understand your choices and guide you to the right instruments that will meet your financial goals.

This article is presented for informational purposes only, and does not represent financial, legal or investment advice or opinion. The provision of the information contained herein and any oral or written communication regarding the same should not nor is intended to be construed as such. Interested persons should seek independent professional advice before acting or foregoing action in relation to any of the matters mentioned herein. E&OE.