After months of house hunting, you’ve just bought your first home, and you’re over the moon about it. Finally, a place you can call your own! But before you can get settled, you need to get a few things in order—namely, your insurance.
What would happen if you passed away before your mortgage was paid off? Who would be responsible for those payments? If you have a family, you might worry that they could default on the mortgage, and suddenly have no place to live.
To find the best life insurance policy in Canada, it pays to do your research first. There are a few different types of insurance to brush up on before you make your decision. We’ve put together this guide to help new homeowners in Calgary find a policy that meets their needs:
Different Types of Insurance for Mortgages
Getting a mortgage can be exciting for a new homeowner, but it also means that you’re now in a significant amount of debt. You want to make sure that you don’t transfer that debt to your loved ones.
Trying to sort out all the different types of insurance can be complicated. Here are some of the key differences between them, and when you might choose one over another:
Mortgage life insurance
To protect your family from losing your home if you pass away, mortgage life insurance is an excellent investment. In the event of your death, the insurance provider will pay out the remaining balance of your mortgage via a death benefit.
You can still buy a home without mortgage life insurance. But if you pass away unexpectedly, the debt will be transferred to your loved ones, who may lose possession of your home. This policy alleviates concerns about passing on mortgage debt to loved ones if you pass away.
Mortgage disability insurance
In life, we come to learn that accidents happen. We may get injured and be unable to resume our former job. If that happens, you might wonder how you’ll pay off your mortgage.
This policy covers all your mortgage payments if you are unable to work due to a disability. It specifically covers your mortgage but not other expenses like your income or utility bills. In addition, it only covers those payments for a designated period of time. You can also combine it with job loss or critical illness mortgage insurance to address other concerns.
For those who are worried about covering mortgage payments if a disability interferes with their job, this might be the perfect insurance policy for you.
Mortgage default insurance
Unlike the other types of insurance that we’ve mentioned, this one is often mandatory. Also known as CMHC (Canada Mortgage and Housing Corporation) insurance, it’s designed to cover the mortgage lender’s expenses if you default on payments.
But there’s a caveat here: you aren’t required to purchase mortgage default insurance if your down payment covers more than 20% of the house. This incentivizes home buyers to save up a larger down payment before buying a house to avoid this expense (which is typically 2-4% of the mortgage).
What’s the Difference between Home Insurance and Mortgage Life Insurance?
If your home is damaged in a natural disaster or break-in, home insurance will cover the cost of repairing it, replacing lost belongings, and providing alternate living arrangements if needed. It does not cover your mortgage payments.
Mortgage life insurance pays out the remainder of your mortgage if you pass away. But it will not pay for other bills, belongings, or necessary repairs.
Homeowners should consider investing in both types of insurance so that they’ll be protected in a number of situations.
Should I Buy Mortgage Life Insurance or Term Life Insurance?
Both of these policies are meant to pay off debts if you pass away suddenly, but there are a few key differences in how they work.
Mortgage life insurance only covers the amount that you owe for the house. As you pay off more and more of it, your coverage decreases. The coverage ends completely once the mortgage is paid off.
Term life insurance is more general. It can be used to cover debts like the mortgage, but the person who receives it might choose to pay other expenses, like tuition or outstanding bills. After your mortgage is paid off, you still have coverage for other expenses.
But the cost of term life insurance will vary based on your health conditions. With mortgage life insurance, you aren’t typically required to undergo health tests. This could make mortgage life insurance more affordable for you than term life insurance. However, the latter offers more flexibility.
We hope this guide has cleared up some of your questions about mortgage life insurance. Given that a house is one of the biggest purchases people make in their lives, that amount of debt is not something you want your loved ones to inherit. Make sure that your payments are covered if you pass away by purchasing mortgage life insurance.
Justin Havre is the top producing REALTOR® with RE/MAX First, Canada's very first RE/MAX brokerage. Calgary real estate is his passion; Justin specializes in Southwest & Northwest Calgary homes for sale. He can be reached at 403.217.0003 or contacted through this site.