Difference Between Life Insurance and Mortgage Insurance

When considering financial protection for your family and your home, it's important to understand the difference between life insurance and mortgage life insurance. While both offer security, they serve distinct purposes:

Life insurance provides a broad safety net, covering various expenses like living costs, education, and medical bills in the event of your death.

Mortgage life insurance is specifically designed to pay off your home loan if you pass away during the mortgage term. 

What is Life Insurance in UAE?

Before exploring the difference between life insurance and mortgage life insurance, it is essential to understand each term individually. This section will provide an overview of life insurance. 

In simple terms, life insurance is a legally binding contract that guarantees the policyholder and their family a death benefit in case of the former’s unfortunate demise. It offers financial support for the policyholder’s family so that they can continue to lead a decent life. 

To ensure that your family maintains their lifestyle even in your absence, you must contribute to the policy — this is known as premium. You can pay the premium as a one- time lump sum or through regular installments. 

How Does Life Insurance Work?

In general, a life insurance plan usually has 3 important components – premium, cash value, and death benefit. Here’s a detailed explanation of each -

• Death Benefit - It is the sum assured paid by the insurance company to the beneficiary in case of the policyholder’s demise. This amount helps in meeting the beneficiary’s future needs. 
• Premium - This is the contribution made to the policy to activate the death benefit and cash value. Premiums are influenced by factors such as policyholder’s lifestyle (smoking and drinking), medical history, age, hobbies, and occupational hazards. 
  If the premium is high, the death benefits are larger. The premium is high for people living a risky life. 
• Cash Value - This component serves 2 purposes – 

i) Savings Component:  As a savings part, the policyholder can use the cash value amount during the policyholder’s life. However, this can be subject to the restriction on number of withdrawals. 

ii) Living Benefit: If the policyholder passes away, the cash value generally remains with the insurance company, contributing to the overall benefit of the policy.

What is Mortgage Life Insurance?

Before comparing  life insurance vs mortgage life insurance , it is important to understand the latter. 

Mortgage life insurance, unlike a traditional life insurance plan, is specifically designed to repay the loans and related costs if the policyholder (the borrower) passes away. 

This type of life insurance pays the death benefit to the lender in case the borrower passes away during the mortgage loan tenure. Such a policy’s tenure is designed to align with the number of years remaining on a loan. The death benefit amount is adjusted annually to reduce the mortgage balance left every year. 

How Does Mortgage Life Insurance Work?

There are 2 types of mortgage life insurance -

• Decreasing Term Insurance - Under this type of insurance plan, the size of the plan decreases along with the remaining loan balance until the two reach zero.
• Level Term Insurance - Here, the size of the policy does not decrease. It is suitable for a borrower with an interest-only loan. 

Thus, before buying a mortgage life insurance plan, you should examine and analyse the terms and conditions of this insurance plan. 

Note -  This insurance should not be confused with Private Mortgage Insurance (PMI). It is suitable for people who take out a mortgage for less than 80% of their home value. 

Life Insurance vs Mortgage Insurance: A Comparative Overview

The following is the difference between life insurance and mortgage life insurance –

Mortgage Life Insurance vs Life Insurance: Which is Better?

When choosing a life insurance policy, it’s important to consider who and what you want to protect. 

For example, if you have children, you might need broader coverage beyond just the mortgage, making a level cover life insurance policy a good option. 

Conversely, if you want to keep costs low and have a repayment mortgage, a decreasing life insurance policy could be a more affordable choice. Every household’s needs are different, but if someone depends on your income, like a partner or children, life insurance is worth considering. 

Consulting a financial adviser can help you choose the right policy to provide financial security for your loved ones.

Key Takeaways

• To understand the difference between life insurance and mortgage life insurance, it is important to know more about the two types of life insurance plans. 
• Life insurance in the UAE is a contract that provides a financial safety net for your family in case of your death. By paying regular premiums, you ensure that your loved ones receive a death benefit, helping them maintain their lifestyle. 
• Life insurance has three key components: the death benefit (the payout to your beneficiaries), the premium (your payment to keep the policy active), and cash value (a savings element you can access while alive).
• Mortgage life insurance specifically covers your home loan. It repays the mortgage if you die during the loan term. This differs from traditional life insurance, which offers broader financial protection for your family. 
• Choosing between life and mortgage life insurance depends on your needs. Opt for life insurance for broader coverage, or mortgage life insurance if your main concern is repaying your mortgage.