I was speaking with a prospect recently and he was exploring between Mortgage and Term insurance.
What sparked him to explore this aspect was because he bought a property recently and was looking to outsource the risk to insurers should anything happen to him.
As such, through my client's endorsement, he reached out to me for advice. I thought this would be a good case study for those who intend to buy properties in the near future and are looking to outsource the risk.
Disclaimer: Due to the Personal Data Protection Act and client's confidentiality, I would not be disclosing the client's name, profile or financial situation. Instead, I will break down based on the factors I would use to consider when choosing a Mortgage or Term insurance.
Before we do any comparison, we need to first understand what the respective insurance means.
Mortgage Insurance
As the name suggests, the insurance is meant to cover the mortgage loan should the payor of the loan passes on.
Across the years, we will gradually pare down our loans. As such, Mortgage Insurance coverage will also decrease across time.
Here's how it looks visually.
Term Insurance
As for term insurance, here's how it looks visually.
Given that the coverage is death only, there is no special clause we need to be wary of.
Insurers mainly will need a death certificate, proof of relationship to the deceased and/ or Nomination Form/ Will to process the payout to the family members/ beneficiaries.
Round 1: Price
Based on the above 2 pictures, we will think that Mortgage insurance is cheaper than Term insurance right?
Especially since the coverage of Term Insurance is higher across time.
Term insurance is cheaper than Mortgage insurance!
Disclaimer: the pricing of Mortgage Insurance varies with age, coverage period and interest rate estimated. The example above is based on a 3% interest rate. The higher the interest rate, the more expensive the Mortgage Insurance premium will be.
Winner: Term insurance
Round 2: Premium Term
Though both insurances cover the same period, the premium term is different.
Generally, the premium term for Mortgage Insurance is shorter than the coverage period.
In the example above, the coverage period is 27 years. The premium term is only 25 years.
As for Term Insurance, in order to continue the coverage for 27 years, the premium term will have to be 27 years.
Winner: Mortgage Insurance
TL;DR
Every insurance category has its own strengths. What is better for one, may not be true for the other. It depends on your profile, situation and preferences.
If you are looking for a shorter premium term, then Mortgage Insurance may be suitable for you.
If you are looking from a value-for-money standpoint, Term Insurance may make more sense.
Before you commit to any financial decision, it is always beneficial to speak with a licensed financial advisor for more information. You don't want to be hasty and make a wrong decision as a result.
If you want to find out if you could potentially save money from your Mortgage or Term Insurance, feel free to connect with me.
P.S: The above scenario may not be true for your case. Premiums will differ according to age, gender, smoking status, coverage period and sum insured. Please speak with a licensed financial advisor prior to making any purchase or changes.
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