While life insurance products are widely available and are advertised extensively, mortgage life insurance still lives in the shadows. However the latter is an equally potent form of insurance from which you can benefit greatly. But, owing to the many similarities (in structure and benefits), people prefer life insurance over mortgage insurance. This is also done because mortgage insurance isn't always promoted and people are large unaware of the advantages. To understand the differences between life insurance and mortgage life insurance, let's first determine what they are.

What is life insurance?

Life insurance is a type of cover where a fund is built up for the family of a policyholder. This fund is to be used by the family after the death of the policyholder.

What is mortgage life insurance?

Mortgage life insurance is a type of cover where a fund is built up for the re-payment of loans in case the borrower died without paying off the debt.

How do they work?

In life insurance, you pay a premium every month and after deduction of charges and fees, the amount is put away in a fund. If you happen to die within the tenure of the policy, your nominees get a sum assured. If you outlive the policy, you get the sum accumulated. In a term plan, there is no return and when the term ends, you stop paying the premium.
In a mortgage life insurance, you pay a fixed premium but the value of your policy decreases as your mortgage amount decreases. It is known as a decreasing fund. So the policy remains active till the time your loan is repaid. If you happen to die within the tenure, the insurance company pays the sum assured directly to the bank and your family is left debt-free.

The main differences

Type of plan - When you buy a life insurance plan, the value of the plan, that is the sum assured, remains constant throughout. Irrespective of the time of your death, the insurer pays out a uniform claim amount. However, in mortgage life insurance, the fund value depreciates as you keep paying off the loan. So if you happen to die after 5 years, having paid off half the loan, the insurer will only pay the remaining amount to the lender.

Beneficiary

In a life insurance policy, you choose a nominee and this person becomes the beneficiary who receives the lump sum amount after your death. The beneficiary can use the money to clear debts, pay off bills, support parents, etc. In other words they have a lot of flexibility. In mortgage life insurance, the bank (or any other lender) automatically becomes the beneficiary. Your family receives no monetary assistance from the insurer. The only way they benefit is that they get to keep the house.

Insurance policies must be bought with a lot of care. If you have the finances, then definitely opt for both these policies to provide extra cover for your family. However, if you are on a tight budget, you can make do with a well-rounded life insurance plan. Speak to your insurance advisor and see how the various options suit you.

Written By: Deepak Yohannan

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
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