Purchasing a new home is an exciting time. But as thrilling as it may be, buying property comes with new responsibilities, like paying off the mortgage every month. If something happens to you, would you be able to keep up with the payments for an extended period? If the answer is no, you may want to look into mortgage disability insurance.
It provides protection during financially unstable times by taking care of your largest monthly expense. Mortgage disability coverage, which is available as a standalone policy or as an add-on to a mortgage life insurance plan, helps ensure that your family does not lose their house if you are unable to work due to injury or illness.
Keep reading to find out how mortgage disability insurance works, its cost, and benefits.
How does Mortgage Disability Insurance work?
In exchange for premium payments, the insurer promises to pay all or part of your monthly mortgage payment for a set period. Your policy contract will state the maximum monthly payout amount, the maximum period for which the benefit will be paid, and other details.
Before you sign the contract, read it to ensure you understand its terms and conditions. While every mortgage disability insurance plan is unique, some terms common to all include:
- The maximum coverage amount – This refers to the maximum amount your plan pays in the event of a disability. For example, let’s say your monthly mortgage installment is $4,000. You buy a policy that pays 100% of the monthly mortgage payment or $3,500, whichever is smaller. In this case, the insurer will pay $3,500 every month to the lender on your behalf and you will pay the remaining $500.
- The benefit period – This refers to the maximum period for which the insurer will pay the mortgage payments. With most mortgage disability insurance, the benefit period is 24 months. If you become disabled, your insurance will pay your monthly mortgage payments until you recover and return to work, or until the benefit period expires, whichever comes first.
- The waiting period – The disability benefit payments do not start immediately after you become disabled. Rather, they begin after a certain period has passed. This period is called the waiting period or elimination period. Generally, the waiting period is 30 days, however, longer wait times are not uncommon.
Here’s an example of how mortgage disability insurance works:
When Simon took a mortgage to buy a new home, he was worried about how he would pay the monthly installment if he couldn’t temporarily work due to injury or illness. Therefore, when he learned that his mortgage lender is offering mortgage disability insurance at affordable rates, he decided to sign up for it.
Seven years later, Simon was involved in a serious car accident and couldn’t work for eight months. During this difficult period, his policy began making monthly home loan payments. As a result, Simon did not default on his mortgage and was able to remain in his home until he fully recovered and was able to resume work.
What is the cost of Mortgage Disability Insurance?
How much you will pay for mortgage disability insurance depends on the following factors:
1. The monthly mortgage payment
Mortgage disability insurance premiums are directly proportional to the size of your monthly mortgage payment. The larger the monthly mortgage installment, the more you will pay for coverage, other things being equal.
2. The elected percentage of coverage
Mortgage disability insurance covers up to a certain percentage — like 50% or even 100% — of your monthly mortgage payments. The higher the percentage of coverage you want, the greater the insurance cost.
3. The waiting period
Generally, mortgage disability insurance plans come with a 30-day waiting period. But some insurers may let you select a longer waiting period in exchange for a lower premium rate.
Any health condition that increases your risk of developing a disability will increase your premium rate.
Since the risk of disability increases with age, older applicants tend to receive higher premium rates than their younger counterparts.
Purchasing additional coverage, like mortgage critical illness, will increase the cost.
How to know if I’m eligible for mortgage disability insurance?
Certain eligibility criteria for mortgage disability insurance may vary by insurer. However, most insurance companies will write you a policy if you are:
- A Canadian resident
- Between the ages of 18 to 64
- Either the borrower, guarantor, or co-borrower of the home loan
- Employed full-time, self-employed or employed seasonally
To qualify for mortgage disability coverage, you must be employed full-time, self-employed, or have seasonal employment and must have worked the last season. Some insurance carriers may approve part-time workers if they work a certain number of hours per week.
Mortgage disability insurance has an age limit. If you exceed this limit, the coverage will terminate. For instance, mortgage disability coverage with many providers ends once the insured turns 65.
As part of the screening process, you may be asked to answer a few health questions. Depending on your answers, the lender may request a complete health assessment. Having certain pre-existing medical conditions could lead to a premium hike or even disqualify you from coverage.
Mortgage life insurance vs. mortgage disability insurance vs. CMHC’s mortgage loan insurance
Mortgage life insurance pays the balance on your mortgage in the event of your untimely death. As you repay your mortgage, the death benefit of your mortgage life insurance coverage decreases. The payout is the same as the home loan balance at any given point.
For example, Doris borrows $200,000 from a mortgage lender and takes out a mortgage life insurance policy of an equivalent amount to protect her family. Five years later, Doris dies unexpectedly, owing $160,000 to the lender. This means her mortgage life insurance will pay the lender $160,000 (and not the original benefit amount — $200,000).
Mortgage life insurance comes into the picture only after you pass. It won’t come to your aid if you are disabled and can’t pay the monthly mortgage payments. Mortgage disability insurance, in contrast, provides financial protection from health issues — not death. That is the main difference between the two.
CMHC’s mortgage loan insurance, unlike the other two products, offers no protection to your family. Instead, it protects the lender in case you default on your home loan. CMHC’s mortgage loan insurance (also known as mortgage default insurance) is mandatory when the home down payment is less than 20%.
The following table highlights the key differences between these three financial products.
Mortgage default insurance vs. mortgage life insurance vs. CMHC’s mortgage loan insurance
Mortgage disability vs. mortgage critical illness insurance
Mortgage critical illness pays your mortgage’s outstanding balance in the event of a covered illness, regardless of whether you work or not. In contrast, the mortgage disability coverage kicks in only when your injury or illness is so severe that you cannot work.
Another difference is that mortgage critical illness insurance pays a lump sum amount while mortgage disability coverage pays the benefits monthly.
What Disabilities are not covered?
Typically, mortgage disability insurance plans do not cover disabilities caused directly or indirectly by:
- Drug or alcohol abuse
- Injuries related to illegal activity
- Self-inflicted injuries
- Civil disorder or war
What are the benefits of mortgage disability insurance?
Some of the main benefits of mortgage disability insurance are:
- Ensures your family will not lose their home
Mortgage disability insurance ensures you will not default on your home loan payments even if you are temporarily unable to work due to injury or illness.
- Makes it easier for you to pay out-of-pocket medical costs
By taking care of your largest monthly expense, mortgage disability coverage can free up money for medical and other expenses, like physical therapy, in-home nursing care, home modifications, and childcare.
- You won’t lose coverage if you switch jobs
An individual mortgage disability insurance policy protects you all the time, even if you lose or leave your job.
Mortgage disability insurance takes care of your mortgage payments for a certain period — typically, 24 months — if you are disabled and unable to work. Depending on your plan, it may pay all or part of the monthly mortgage bill, up to a certain amount.
Mortgage disability insurance is a good option for primary breadwinners, especially if they do not have a lot of savings. It can be bought as a separate policy or an add-on with a mortgage life insurance policy.
Frequently Asked Questions
Is disability insurance a good thing?
Disability insurance protects your biggest asset: your ability to earn. For most people, having such a policy is a smart decision because it can significantly reduce the financial impact of a disability. The payout can help you put food on the table, pay your monthly bills, keep up with your mortgage payments, and even save some money for the future.
What period does a Mortgage disability Insurance benefit cover?
Mortgage disability insurance pays benefits for up to 24 months.
Is there a waiting period?
Yes, all mortgage disability insurance plans have a waiting period. Typically, the waiting period is 30 days from the onset of disability. This means if you become disabled, you will start receiving the benefits from the 31st day following your disability. The cost of coverage is inversely proportional to the waiting period. The longer you have to wait to collect the benefits after a disability, the lower the monthly premiums.
What banks offer mortgage disability insurance in Canada?
Various banks offer mortgage disability insurance coverage, including the BMO Bank of Montreal, the Canadian Imperial Bank of Commerce (CIBC), and Scotiabank.