YOU ASK:

What is better for homeowners: to buy life insurance or mortgage insurance when taking out a mortgage?

WE ANSWER:

You can compare the benefits and advantages of both, as well as the cost involved and determine which one works best for you.

  • Mortgage insurance will cover and pay the mortgage company in the event that you default on a loan.
  • Life insurance will pay your beneficiaries the benefit amount in the event of your death.

Advantages of Life Insurance

With life insurance you have more flexibility as to where the proceeds of the insurance will go. You also get to choose who your beneficiaries will be, as opposed to mortgage insurance, where the beneficiary is automatically the mortgage company.

You can also choose to have a higher death benefit, so that your beneficiaries will receive more than just what you need to pay for your mortgage.

The other advantages of life insurance are that the life insurance coverage will not decrease unless you choose to decrease the coverage. With mortgage insurance, although your mortgage debt decreases, the premiums you pay for the insurance remain level.

Also, you will lose the coverage when you transfer to another lender or when your mortgage is in default, is fully repaid or is assumed by someone else. This in contrast with life insurance, which remains with you and stays in force for as long as you pay the premiums.

Arguments in Favor of Mortgage Insurance

However, you should weigh both.

Mortgage insurance will kick in even when you are still living. With life insurance, you should remember that you have to die before the benefits will go to your beneficiaries. What will happen if you were rendered disabled because of sickness or accident, or are fired from your job?

So, in the end, it's not about comparing which among life insurance and mortgage insurance is the better deal for you as a homeowner. It is actually like comparing apples and oranges, since they essentially serve different purposes.

You should also remember that mortgage insurance is required if you can't afford to put up 20% as down payment for your purchase of the house. Thus, you really are required to get coverage for mortgage insurance until such a time that you have enough equity on your home.

In Conclusion

What we recommend is that you get covered for both. Depending on your budget, you should also allocate some for life insurance premiums and for mortgage insurance. This will provide you with a more comprehensive protection.

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