Downpayment / First Time Home Buyer / Insurance / Lenders / New to Canada / Purchase

How does mortgage insurance work?

If you have a mortgage, you have been offered mortgage life and disability insurance, probably more than once! This is different than the high-ratio mortgage insurance required when you have less than 20% downpayment (Read more on that type of insurance HERE). Whether you went through a bank or worked with an independent Mortgage Specialist for your financing, you’ve signed an insurance acceptance or waiver. This week I want to detail what the deal is with the mortgage life and disability insurance, the ‘who, what, why and when’.

What

High-ratio mortgage insurance is required when you have less than a 20% downpayment, though there are some exceptions when financing through alternate lenders. This type of insurance covers the lender in the event the borrower defaults on their mortgage payments. It is a one-time premium payment that is the responsibility of the borrower and can be added to the mortgage or paid from the borrowers own funds on possession date.

Mortgage life and disability insurance is different in that it will pay off the mortgage balance owing at the time if the borrower passes away or in the case of disability insurance, it will cover all or a portion of the mortgage payment while the borrower recovers from an illness or disability. The borrower is paying a monthly premium for each of these options.

You may have heard of life insurance or disability insurance through your employer and may already have it. This type of insurance ensures a lump sum and/or a portion of your wages are paid out in the event of death or disability. In the case of death, these policies state your beneficiary would receive these funds. Under the mortgage version of life insurance, the beneficiary is automatically the lender that holds your mortgage.

There are marked differences between mortgage life insurance specifically and other term or whole life insurance policies offered through your employer, or a non-mortgage related insurance policy. Here are what I believe to be the most important distinctions;

  • Under the mortgage insurance option, the coverage is declining. Even though you pay the same premium every month, in case of death, the life insurance will only pay out the remaining mortgage principal balance owing at time of claim. If you originally took the insurance out for a $500,000 mortgage and a claim was made when there was only $100,000 left owing, only the $100,000 will be paid out.
  • And again, under the mortgage insurance option, if there are two borrowers who accepted mortgage disability insurance, only half the mortgage payment will be covered if only one borrower becomes ill or is injured.

Why

You will likely be offered mortgage life and disability insurance wherever you go for your mortgage. The important statement I want to make about this is; Mortgage life/disability insurance is not a requirement for your mortgage to be approved. Banks and lenders offer it to ensure their assets are insured, assets in this case being the mortgage borrower and the property. If something bad happens to the borrower, they either need to have the signed waiver on their file or the acceptance. No type of coverage decision on file can spell disaster as the broker and/or lender could be held liable for not offering it in the first place.

Who

Who benefits from mortgage life insurance? Usually it’s the lender as they are the beneficiaries of the policy as I mentioned above. As every claim is different and I am not a licensed insurance agent, I can only offer my thoughts without going into too much detail. Under the majority of scenarios, the mortgage holder (the lender) is the only one who gets cash in the event of a claim sufficient to pay the mortgage balance owing off in full. If you suffer some kind of injury or illness and need to make a claim on your mortgage disability insurance, that’s another minefield of fine print that you need to read before you start paying the premiums. The type of mortgage disability insurance I can offer as a Independent Mortgage Specialist typically covers your payment for up to 12 months per injury, as long as you’re the only borrower. Each companies terms are different, so it’s important to know what you’re covered for before you commit to any type of insurance policy.

When

When is life and disability insurance a good idea? I believe the simple answer is when you take out any sort of debt. If you take on a large asset and debt such as a home along with a mortgage, you need to be insured. Insurance through your employer may not be enough while mortgage life and disability insurance may not be the ideal option for you. I strongly suggest you explore other avenues for other types of coverage by crunching the numbers, contacting the right professionals for advice and getting cost quotes. Again mortgage life and disability insurance is not a condition of getting approved for a mortgage; take the time to find the right coverage policy that suits your growing needs though don’t put it off for too long.

Getting a mortgage on a home is a big commitment; the bills don’t stop if something happens to the borrower(s). Your health and finances are fragile and if something happens to one, proper insurance for the other will help you through hard times. As a Mortgage Specialist in the industry for over 30 years, I have a lot of experience with mortgages as I do them all day, every day. To find an expert in insurance, talk to another professional you trust for a referral. If that’s not an option, make sure you do your research, read the reviews, and find an insurance advisor you trust to find your ideal coverage at an affordable cost. On that note, don’t forget to factor insurance costs into your monthly budget when deciding on a house price and mortgage payment range that fits into your lifestyle.

If you have mortgage questions, contact Jackie at 780-433-8412 or info@mortgagegirl.ca. Stay in the loop by following on Twitter @mortgagegirlca.

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