If you’re about to buy a house or already have one, you were likely offered mortgage life and disability insurance. If you
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What is mortgage insurance?
Your home is probably your most important asset, not to mention its sentimental value! No one is safe from an accident that deals a heavy blow to personal finances. The loss of one's home because of unforeseen life events is a human catastrophe. That is why it is a good idea to insure it. New home buyers can protect their property by taking out mortgage insurance. This covers situations where you are unable to pay your mortgage balance.
Mortgage insurance is not CMHC insurance
Mortgage insurance is coverage that pays off the balance of your loan to your bank if you die or become disabled. This insurance is not related to the Canada Mortgage and Housing Corporation (CMHC) insurance that you must pay for when you buy a home with less than 20% down payment.
Protection for your loved ones in the event of death
The death of a loved one is a tragedy, especially when they leave a spouse or children behind. Will those left behind have the financial means to keep the house and make all the mortgage payments? While the whole family tries to cope with their grief and mourning, the last thing the deceased would have wanted is to leave them with financial worries. Mortgage life insurance helps preserve the quality of life of your loved ones.
Coverage against loss of income due to disability
We prefer not to think about it, but accidents happen quickly and illness strikes without warning. In addition to life insurance, it is a good idea to add a disability component to your mortgage coverage. Many banks and private insurers offer both types of cover combined, and some may also include critical illness insurance. With no salary or reduced income due to illness, the insurance you may already have through your employer may not be enough to cover all your payments. Without supplementary insurance, how will you make up the difference? Being well-insured helps you return to better health, as recovery is free from the stress of mortgage payments. Some insurers even offer psychological, legal and recovery services to support you throughout your convalescence.
Key times to buy mortgage insurance
Once you take out a mortgage, you become responsible for paying it back. This is the ideal time to buy an insurance policy. It is quite possible that your lending institution will offer you its mortgage insurance product, but you are free to shop around for another company. Another key time to assess your insurance needs is when you renew your mortgage. However, you can buy this type of insurance at any time during your mortgage term. When you apply, the insurer may ask you medical questions. It is therefore best to take out mortgage insurance while you are still young and healthy.
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Frequently asked questions about mortgage insurance
What is mortgage insurance?
Mortgage insurance is for the purpose of repaying your loan. A mortgage is a loan given to you by a lending institution, such as a bank. A contract binds you to your lender, which you must repay according to the terms and conditions. Mortgage insurance protects you in case you are unable to make this repayment, due to disability or death. It therefore minimizes the financial impact of a death on your spouse, for example, who would be left with a house to pay for alone. Mortgage insurance can complement any life or disability insurance you already have.
How much does mortgage insurance cost?
The cost of mortgage insurance varies depending on a number of factors, such as your age, health, and the amount you want to insure. The premium you pay each month is based on an additional interest rate applied to the balance of your financing, for example, $0.13 per $1,000 of loan. If you are young, it is possible to get a policy for just over $20 a month on a $400,000 loan from a private insurance company. With a bank, the average price is around $50 per month. However, prices can vary enormously and exceed $100 per month. This is why you should compare policies before choosing your insurance and check that they include life and disability insurance unless you only want to protect yourself from one of these situations.
Is mortgage insurance mandatory in Canada?
Mortgage insurance is not mandatory. It is only life and disability insurance, not CMHC loan insurance, which is mandatory if your down payment is less than 20%. You are free not to have mortgage insurance. However, some lenders may be reassured that you are buying mortgage insurance which may make it easier for you to get the loan.
How does mortgage insurance work?
Mortgage insurance usually has two components: life insurance, which pays off the balance of your mortgage if you die, and disability insurance, which pays the monthly payments if you can no longer work. It is often free with the lending institution that gives you your mortgage, but you can shop around. This type of insurance is tied directly to your loan, which means that the money will be paid to the lender in the event of a claim and cannot be used for other purposes. However, if you have chosen more comprehensive life and disability insurance from a private company, the money can be paid to you personally. At that point, you use it to pay off all your debts.
Is mortgage insurance worth it?
In some situations, mortgage insurance is worthwhile. If you are having trouble getting affordable life and disability insurance, for example, because of a health problem, it may be easier to get mortgage insurance only. In addition, this insurance could help you get a better interest rate from your lender. Find out if you would save money in the end. On the other hand, if you already have life and disability insurance that covers you for an amount greater than your mortgage balance, there is probably no need to add additional mortgage insurance.
What does mortgage insurance cover?
This type of insurance covers the balance of your loan. The main disadvantage is that the potential payout decreases over time. Your monthly loan repayments and annual repayments reduce your debt, which reduces your coverage by the same amount. Mortgage insurance only covers what you have left to pay. For example, if something happens to you in 10 years and your debt is only $50,000 at that time, you won't get more than that amount. However, your premium – the cost of the insurance you pay each month – does not necessarily go down. Ask a potential insurer if they offer an insurance premium that decreases with your balance.
Can I cancel my mortgage insurance?
Yes, you can cancel your mortgage insurance if you find that it is no longer suitable for you. You can cancel your mortgage insurance at any time, allowing you to change insurers or simply end it when your mortgage balance becomes so small that it is no longer relevant. To cancel your policy, you need to send a notice of cancellation to your insurance company, for example by registered mail. There should be no penalty.
Does mortgage insurance cover the death of a spouse?
With joint mortgage insurance, two people are insured, you and your spouse. The survivor is entitled to the death benefit, regardless of which one of you has died. The other option is to each take out life and disability insurance. The total cost will probably be higher, but it may be worth it, depending on the coverage you choose. If you are the only insured owner, you may receive nothing when your spouse dies.
How long do I have to pay for my mortgage insurance?
With a private insurance company, you can decide how long you want your insurance to last, from 5 to 40 years. If you buy your mortgage insurance from your lender instead, your premium is paid monthly for the term of your mortgage, which is the length of your contract with them. At the end of the term, for example, 4 or 5 years, you have to negotiate a new insurance policy.
Are home insurance and mortgage insurance the same?
Mortgage insurance is completely different from home insurance. Home insurance covers you against an incident that damages your property, for example. It will not pay the balance of your loan for you if you become unable to pay. It is mortgage insurance that covers the balance of your loan. You can think of mortgage insurance as security for your loved ones, who won't have to pay off your loan, and home insurance as protection for your most valuable asset, your home!
Do I need mortgage insurance if I already have life and disability insurance?
This is a complex question and in many cases, the answer is "no". Why not? Because life and disability insurance pays an amount of money directly to you that can be used as you see fit. This money can be used to pay off your mortgage. However, the decision must be made based on the amount insured and the specific coverage of your life and disability insurance policy. For example, get confirmation that the sum insured is sufficient and that the term extends to the end of your loan.
What is the difference between mortgage life insurance and life insurance?
Mortgage life insurance protects your lender, such as your bank, if you die before paying off your loan in full. They are the direct beneficiaries. With personal life insurance, you choose your own beneficiaries, such as your spouse or child. They can then use the insurer's payment to pay off your mortgage and other debts. In addition, mortgage life insurance ends once your house is paid off, whereas personal life insurance can be temporary or permanent, depending on the term you choose.