Difference Between Mortgage Insurance and Life Insurance

Mortgage Insurance vs Life Insurance

Owning a house is a dream for all of us. But a good house is a costly affair these days. Purchasing a house thus requires a lot of borrowed money. If you are a borrower, you need mortgage insurance if your down payment is less than 20% of appraised market value or purchase value of the property you are purchasing. The mortgage insurance does not protect you. It protects your lender from the risk of your defaulting on the payment to him. Mortgage insurance can be availed of from both the government and the private players, government providing mortgage insurance even at less than 3% down payment.

Life insurance on the other hand is an altogether different proposition. A life insurer insures the ‘life’ of a person for a certain length of his life span or even for whole life  and in the unfortunate event of death of the insured, the insurer pays the insured amount (called ‘sum assured’ in insurance parlance) to the nominee or legal heir of the insured. Life insurance premiums are required to be paid at agreed intervals for whole of the period of life risk coverage.

The difference between mortgage insurance and life insurance are given below to give you a better overview of both type of insurances.

1. Mortgage insurance is normally taken by the borrower to protect the lender against any default in payment by him. So it is a case of ‘I pay for insurance to protect you from me.’ Life insurance on the other hand is taken by the ‘insured’ on his own life to protect his own family in the event of his untimely death.
2. Mortgage insurance premium payment can be stopped by the borrower once the loan to value ratio of the property mortgaged hits the 80% mark in case of private mortgage insurance (in case of government mortgage insurance, the premium payment may have to be continued for life of the loan). Premium payment for life insurance product is to be continued for the entire period of insurance coverage.
3. In mortgage insurance three parties are involved, viz, the borrower, the lender and the insurer whereas the life insurance is essentially a contract between the insurer and the insured.
4. Life insurance policy is taken on the life of the insured. The payment by insurer in case of life insurance is almost always substantially more than the total amount of premium paid to the insurer by the insured. In mortgage insurance there is absolutely no refund of premium when the mortgage insurance is terminated.
5. Mortgage insurance premium may or may not be tax deductible, but life insurance premium is almost always tax deductible.

Summary
1. Mortgage insurance is insurance on property purchased by the borrower whereas life insurance is insurance on life of the insurer.
2. Premium for life insurance is to be paid for entire period of policy term, but the mortgage insurance can be terminated after the loan-to-value ratio of the property hits 80% mark.

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