When purchasing a property, there are several factors to consider. One of them is how will you protect it.
If you were to die, the last thing you'd want is for your family to be saddled with a large mortgage. So, what kind of mortgage insurance should you consider? Term life insurance or mortgage insurance?
While both provide a safety net if something goes wrong, term life insurance is usually a preferred choice because it is less expensive and provides more flexibility. You can have peace of mind knowing that your family will be taken care of if you pass away early.
Do You Need Life Insurance for a Mortgage?
Whether or not you need life insurance on the home loan depends on your answer to the following question:
Would your family be able to pay a large mortgage payment every month if you died today?
If the answer is no, you need life insurance. It ensures that your loved ones would not lose their home if something were to happen to you. Life insurance provides your beneficiaries with a cash payout that they can use to pay down their mortgage, among other things.
Life insurance comes in two flavours: term and permanent.
Permanent life insurance builds cash value and has no end date, meaning the coverage lasts as long as you live. But it is 10 to 15 times more expensive than term life. The high coverage cost, in turn, makes it an expensive option for covering the mortgage.
Term life insurance, on the other hand, lasts for a set period of timeis an excellent alternative for mortgage protection. You may rest easy knowing that your family will be protected if you choose a policy that will last at least as long as the amortization time and has a death benefit large enough to pay the mortgage balance.
Is Mortgage Insurance Mandatory?
No, mortgage insurance is not mandatory in Canada. There is no law that states you must buy it to qualify for a mortgage.
But, if you have close ones who rely on you financially, you may want to consider protecting yourself by purchasing mortgage insurance or life insurance. Both can assist your family with repaying your mortgage if you die unexpectedly.
When Should You Purchase Life Insurance When Buying a House?
If you have a mortgage to fund your home, you should get life insurance before you move in. If you die, your dependents will be able to keep the house without having to tap into their funds to pay down the mortgage sum.
What Insurance Do You need to buy a house in Canada?
The type of insurance you would need to protect the mortgage depends on the size of your down payment and personal factors.
There are four types of insurance products to choose from:
- Life Insurance
Term life insurance is more affordable than permanent life insurance since you only pay for coverage when you need it most. This makes it the best option for financial needs that have an end date, like a mortgage.
- Permanent Life Insurance
If you have both temporary financial needs (like a mortgage) and permanent needs (like estate plan tax liabilities), a permanent life policy may suit you better. Although these policies are more expensive, the benefits include lifelong protection and the accumulation of financial value. When you are still living, you can use the latter for any purpose, such as meeting a financial emergency.
- Mortgage Life Insurance
Mortgage life insurance is a type of life insurance policy that is linked to your mortgage. If you pass with a mortgage balance, it will pay that amount to the lender.
Similarto life insurance, mortgage life insurance helps your family stay in their home after you’re gone. However, its proceeds go directly to the lender instead of to your beneficiaries. Also, its coverage amount decreases as you pay down the mortgage. At any given time, the death benefit is the same as the mortgage balance.
Most people prefer term life over mortgage life insurance because it is cheaper, has a guaranteed death benefit, and gives the freedom to name anyone as the beneficiary. But, if you have underlying health conditions that make term life insurance too expensive, purchasing mortgage life insurance may make sense.
Unlike traditional term life insurance policies, mortgage life insurance doesn’t require a medical exam. As a result, even if you are in terrible health, you can obtain a reasonable rate.
- Mortgage Default Insurance
If you buy a home for less than $1 million and put down less than 20%, you must obtain mortgage default insurance. It is most typically provided by the Canada Mortgage Housing Corporation (CMHC), but it is also available through commercial mortgage insurance providers such as Canada Guaranty and Genworth Financial.
Unlike other insurance products discussed before, mortgage default insurance protects the lender — not your family. If you default on the mortgage, the lender can take possession of your home, sell it, and recover any shortfall from the mortgage insurer.
Assume you had a mortgage but were unable to make the payments. As a result, the lender took ownership of and sold your property. But, due to a sagging home market, the sale only yielded 85% of the mortgage total. In this case, your mortgage insurer will chip in and pay the remaining amount to the lender.
How Can You Choose The Right Insurance Coverage for your mortgage?
Here are general guidelines regarding which insurance is a good option in your situation.
- Do you need life insurance only for your mortgage and have underlying health conditions? Then consider purchasing mortgage life insurance, which requires little medical underwriting. Yet, if you are in pretty excellent condition, a term life plan might be preferable because it is less expensive.
- Do you need life insurance for multiple financial needs but all of them are temporary in nature? If so, you should get term life insurance. A single plan can meet numerous requirements. They may include paying off your house and other obligations, funding your child's higher education, and replacing your income until your dependents become financially self-sufficient.
- Do you need life insurance to cover your mortgage and also act as an investment tool? A permanent life insurance plan would be right for you. You would also benefit from such a plan if you want to provide for a special-needs child, lower your tax burden at death, or leave an inheritance.
- Are you buying a house worth less than $1 million with a down payment of less than 20%? If so, you will need mortgage default insurance to qualify for a mortgage.
Benefits of Getting Life Insurance for Your Mortgage
Both term life insurance and mortgage insurance help your family pay down the mortgage in the event of your untimely passing. However, term life is a more attractive option for most people because of the following reasons:
- You can pick the policy amount
Mortgage insurance is linked to your mortgage. As such, the coverage amount cannot exceed the balance on your home loan. In contrast, you can buy as much term life insurance as you need. With a single policy, you can all your financial needs.
- It is more affordable
Term life insurance is considerably cheaper than mortgage insurance for people who don’t have any serious medical issues.
- You can pick the policy beneficiary
When you buy mortgage insurance, the mortgage lender is the sole beneficiary by default. But with term life insurance, you can nominate whoever you want as the beneficiary. Also, your beneficiary is free to use the payout however they see fit. If other needs are more pressing, they may choose not to pay off the mortgage. Mortgage insurance, however, locks your family into paying down the home loan.
- It provides a guaranteed death benefit
In the case of term life insurance, the death benefit remains constant throughout the policy period. This is not the case, however, with mortgage insurance. Its death benefit reduces as the mortgage is paid off, while the premium amount remains constant.
When buying a home, many people wonder: Do I need life insurance on the home loan? You don’t need life insurance to qualify for a mortgage per se, but if you have dependents, you should consider it.
The amount of life insurance you need is determined on the size and type of mortgage you have. Other criteria, such as other indebtedness, may also be considered.
Let us assist you if you are still unsure about how much protection you require. Arrange a conversation or send us an email, and our advisors will work with you to establish the appropriate level of coverage for your specific circumstances.