If you're like most people, a home is likely to be the biggest purchase of your life. So it's only natural to want to protect it.
There are several insurance products that new homebuyers need to know about. However, knowing which insurance or mortgage life insurance product is right for you, is not always easy.
In this post, we'll answer your mortgage insurance questions and more! So, let's dive right in.
Do you need insurance to get a mortgage in Canada?
It depends. Mortgage life insurance isn’t mandatory. And CMHC coverage (often called mortgage default insurance) is only mandatory if your down payment is less than 20%.
Also, you don’t need home insurance to purchase a property in Canada. However, it's highly recommended. A mortgage disability insurance policy can also help to further protect your assets.
As a homebuyer, you should at least be familiar with these four insurance products:
While not mandatory, you likely want to buy home insurance if you are buying a home with a mortgage in Canada.
Home insurance provides you with a financial safety net if a covered event results in damages to your home, property, or personal belongings.
Mortgage Default Insurance
Mortgage default insurance is mandatory if you put less than 20% down toward your home. It protects the mortgage lender if you cannot make loan repayments. You can bundle the cost of insurance into your monthly mortgage payments. Alternately, you can pay it along with the closing costs.
Mortgage default insurance is also known as Canada Mortgage and Housing Corporation (CMHC) insurance.
Mortgage Life Insurance
Mortgage life insurance is a type of life insurance product. If you die with a balance on your home loan, it will pay that amount to the mortgage lender. Mortgage life insurance helps your family stay in your home after you are gone. The proceeds from the policy go directly to the lender, instead of to your family.
Mortgage life insurance is also known as mortgage protection insurance (MPI).
Mortgage Disability Insurance
An injury or illness can happen to us at any time. Keeping up with monthly payments can prove challenging if you were to experience illness or injury resulting in disability. This is where mortgage disability insurance can come in. It covers your mortgage payments if you cannot work due to illness or injury.
Aside from the above question, new homeowners often ask questions such as: Is mortgage life insurance mandatory in Ontario? Is mortgage insurance mandatory in Canada?
In Ontario and the rest of Canada, mortgage insurance (mortgage default insurance) is required if you want to get a mortgage with less than a 20% down payment. Lenders like Loans Canada will not issue you a home loan without it.
If you can pay the total amount for your house outright, you will not require a mortgage and therefore you will not require mortgage insurance.
Can you get a mortgage without life insurance?
Yes, you can. Not having a mortgage life insurance policy will not prevent you from getting a mortgage and is not required by law (you are still required to get home insurance).
Mortgage life insurance is meant to protect your family. It gives you peace of mind knowing your family will not lose their home if something were to happen to you.
What are the alternatives to mortgage life insurance?
Mortgage life insurance has only one purpose: to ensure your loved ones get to keep the house after your death. If you pass away before paying off the home loan, your mortgage life insurance policy will pay down the balance.
However, you can also secure your home with term life insurance. It can help your family cover the mortgage loan and other expenses, like monthly bills and tuition fees.
In fact, in most cases, term life insurance provides better financial security for your family. Here are the main advantages it has over mortgage life insurance.
- Considerably lower rates
Term life insurance is usually less expensive because it requires a medical exam. While a medical exam may seem inconvenient, it is actually a good thing. The more an insurer knows about your health, the more accurately they can calculate the risk they are taking on by insuring you. This, in turn, can translate into better rates for many applicants.
Most mortgage insurance lets you forgo a medical exam. Hence, they are costlier than a comparable term life policy.
- Get more coverage
With term life insurance, you can get as much insurance coverage as you qualify for. Mortgage life insurance, by contrast, is tied to your home loan. The payout is equal to the amount you owe on your mortgage — no more.
- Level death benefit
Term life policies have a level death benefit. This means the death benefit amount does not change over the course of the life of the policy’s term. By contrast, the death benefit amount of a mortgage insurance policy reduces annually. Its premium, however, remains the same. As time passes, you make the same premium payments as before for less coverage.
- Freedom to use the payout as desired
With mortgage life insurance, your loved ones get locked into using the death benefit amount to pay down the loan. Even if other needs are more urgent, they cannot use the payout to cover them.
Term life insurance, on the other hand, does not have any such restrictions. Your family is free to use the proceeds however they like.
- Select your own beneficiary
You can name anyone as the beneficiary on your term policy. However, in the case of a mortgage life policy, the beneficiary is always the lender. The death benefit amount gets paid directly to your mortgage lender — not to your family.
- Option to extend the policy term
You can renew a term life policy as it approaches the end of its term. By contrast, a mortgage life policy ends with your home loan. Once you pay down the mortgage, the insurance coverage ends too.
Is mortgage protection insurance worth it?
Mortgage protection insurance is usually costlier than term life insurance. It is also less flexible. For most people, term life insurance is likely to prove a better option.
However, there is one scenario when mortgage protection insurance might be worth it. Since it does not require a medical exam, you can get coverage even with an existing medical condition. If you have an illness that disqualifies you from getting term life insurance or will increase your premium rates significantly, mortgage protection insurance could make sense for you.
Although Mortgage life insurance is not mandatory, it can be a useful safety net. It ensures your family does not face financial stress or, even worse, a foreclosure if you were to die with a balance on your mortgage. However, since it is more expensive and less flexible than term life insurance, it is only a good option for people with medical conditions that prevent them from getting a term life insurance policy. Most others are likely to find term life insurance a better option.
Dundas Life can help you find the best policy at the most affordable price.