Term life and mortgage life insurance: is there a difference?

1.5 million families may be in risk of foreclosure since they do not have enough life insurance to pay off their mortgage.

Source: GoCompare.com September 2011 Research

So you’ve jumped right in and made one of the biggest decisions of your life – the purchase of a house. This will require a major financial investment. Like most, you will usually pay for the house via a mortgage.

But as with long term financial investments, there are risks involved. What if you or your spouse dies while the mortgage is not fully paid? Will your family be able to complete the mortgage payments without your income? Or will you expose them to the possibility of foreclosure?

How mortgage life or term life insurance can help

Mortgage life insurance is a type of term life insurance product and is designed specifically with the mortgage debt in mind. It comes in two types:

mortgage term compared to decreasing term life

On the chart above: Comparison between level mortgage term life and decreasing mortgage life insurance.

Term life insurance, on the other hand, is more general and allows the beneficiaries more freedom as to how they will spend their money. They can decide to pay off the entire mortgage or pay just the monthly amortizations and spend the rest of the money for other needs such as:

To give us a better understanding of the differences between the two policies, a table is provided below:

Mortgage Life Insurance Issue Term Life Insurance

To ensure that the mortgage is fully paid up when the Person Insured dies.

What is the purpose of the cover?

The proceeds of the life insurance can be used however the beneficiaries see fit.

The coverage is based on how much mortgage debt you have. Usually, the coverage is programmed to decrease over time as you pay off the mortgage. By the time the policy is about to expire, the coverage is down to 0.

How much cover is provided?

The Insured chooses the level of insurance he wants.  It is suggested that the amount of insurance can cover the income of the insured for a specified number of years, pay off existing loans and cover related cost of death.

Coverage term is usually based on the number of years the mortgage is issued.

How long will the coverage last?

The insured can choose the length of the coverage. After the term has ended, the insured can opt to terminate the cover completely or to renew it (with possible increases in premiums).

The bank is usually listed as the policyholder and has control of the policy. This means that the bank can cancel or change policy details.

Who owns the policy?

The Insured or the one who pays the premiums is given the rights as owner.

The bank is the beneficiary so it gets the proceeds of the life insurance.

Who gets the insurance proceeds?

The Insured selects his beneficiaries, who will usually be his spouse and other loved ones.

  • Cheaper cover, when one considers that the cover is usually a decreasing term life insurance.
  • Premiums savings through several options. You can save on premiums since the cover is usually a decreasing term cover.
  • Convenience. The mortgage life insurance premiums are tacked on to the monthly payments, so you just pay to one account.
What are the advantages of the product?
  • Flexibility. The Insured can make changes to the policy.
  • More financial freedom. The beneficiaries have the discretion of how to spend the insurance proceeds.
  • Fully portable. The insured gets to keep the cover, regardless of whether the mortgage remains with the issuing bank or is reissued by another mortgage lender.
  • The risk of losing out on the cover. If the bank decides to transfer your mortgage, the insurance cover may not necessarily follow. The same thing happens when you decide to have the mortgage reissued with another bank.
  • Risk of non-payment. If you fail to disclose key medical information (whether you or your doctor know it or not), the life insurance claim may be denied.
  • No premium “discounts”. If you are healthy, there are no discounts or “standard premiums”.
  • Premiums not guaranteed. If the bank decides to transfer the cover, the premiums may be subject to change.
What are the disadvantages of the product?
  • Risk of losing the house. The house is a considerable investment. If the beneficiaries don’t use the insurance proceeds to pay off the mortgage, there is a risk to losing the house.
  • Premiums may increase. Upon renewal of the cover, the payments may increase due to one’s medical condition.

Can consider getting a more complete cover that includes payments if the insured:

  • gets disabled
  • becomes unemployed
  • is diagnosed with a critical illness
How can I strengthen my cover?

Can add riders to the policy. Know more about strengthening your term life policy

Updated on: 03.06.2013

To secure your family's future, call now 0808 231 7035 and get your term life insurance quote immediately.

Types of insurance:
Term life insurance 101:
Life insurers:
*Scottish Provident 2012 life cover claims paid report.