Living through the pandemic has given Canadians a lot to think about. Daily news items about hardships families are going through gives us all pause.
One topic of discussion in households these days centers on insurance. For example, did you know Canadian insurers paid out more than $154 million for COVID-19 related deaths in 2020?
You might be asking yourself some important questions about protecting your family. So, if you're planning on buying a home, the subject of mortgage life insurance might have come up.
So now you'd like to know, is mortgage life insurance mandatory in Canada?
To answer this important question and more, keep reading. Here is a complete insurance guide and how it impacts your mortgage. Let's begin by explaining the meaning of mortgage life insurance.
What Is Mortgage Life Insurance?
You can buy this type of policy as protection if you, as the borrower, die during the mortgage term. In that event, the policy will pay off or pay down the mortgage amount on the policy.
Surviving family members will not have to take on the extra burden from lost income. Instead, an insured amount equal to the outstanding debt pays off the mortgage for the surviving family.
There are benefits to this kind of insurance. For example, where there is only one income earner, this protection allows families to stay in their homes. Your mortgage will have at least been paid by the policy, but no funds go directly to family members.
Mortgage life insurance terms have the same duration as the mortgage term. Also, with the policy arranged at the same time as the mortgage, the premium never changes. Be aware, however, that as your mortgage amount decreases, so will the value of the policy.
If the unthinkable happens, any other insurance can go to other expenses. This is helpful when survivors need to think about funeral costs or other expenses. But, at the same time, let's prevent any confusion with other types of insurance.
Mortgage Insurance vs Life Insurance
Mortgage insurance is generally for homebuyers with less than 20% to put down on the house. A lender who requires you to get home insurance will help get the policy.
Mortgage insurance protects the lender against default in payment for any reason. In the event of a death, only the mortgage lender receives the funds to clear the debt.
This sort of default insurance generally works through CMHC. So, is home mortgage insurance worth it? High-risk lenders prefer you to have it.
Insurance isn't mandatory if you are a buyer in this category. But, as a high-risk borrower, with mortgage insurance, you are more likely to get the mortgage approved.
You can buy life insurance policies for any amount you choose. However, your premium will depend partly on the size of the policy. In addition, there are two types of life insurance available to customers.
You may open a term life insurance policy which is what it sounds like. You choose the length of the term, and your premium remains unchanged throughout. When the term runs out, however, there is no equity left in the policy.
There is also insurance coverage for your life, which covers family in the event of your death. The policy never runs out as long as premiums are up to date. Yet, the rate will change with age and health factors.
Either way, the terms of a life insurance policy are separate from home borrowing policies. The difference is, your beneficiary will get paid the lump sum value in cash.
Surviving family members can use the funds. They can choose to pay down the mortgage or address other debts and expenses. The term of a life insurance policy does not have to equal the term of a mortgage.
Personal life insurance is also flexible and can change with your needs. As your financial situation changes, you can adjust your policy without penalties. It does not correlate with the mortgage at all.
Do you need life insurance to buy a house in Canada? No, there is no legal requirement to have life insurance when you buy a home. But, it's worth considering this type of protection if you are not taking out mortgage insurance.
How Much Does Mortgage Life Insurance Cost?
There are two main factors to determine the cost of your mortgage life insurance. First, as with most insurance policies, your age when you apply will have a bearing. Second, the amount of coverage you need affects the cost.
Other factors involved include your credit score, your health, and the loan to debt ratio. In addition, mortgage insurance rates will end up costing more because they generally come with high premiums.
Banks, credit unions, or most mortgage lenders can offer mortgage life insurance. But, there is a range of premium prices with different institutions. In addition, policies attach with the mortgage term, and as such, the payout value goes down with the mortgage in time.
Most come with a thirty-day grace period. So, if you decide against the insurance in that period, you will get your money refunded. The process is pretty simple because the only payment of the claim is to the mortgage.
There are also private insurance providers that service mortgage life insurance. These companies offer a wider range of policies and prices.
Can I Cancel Mortgage Life Insurance?
All mortgage life insurance policies are tied to the mortgage contract. So, to cancel your mortgage life insurance, you would need to cancel the existing mortgage. Cancellation of any mortgage term always comes with penalties, regardless of the reason.
You are still subject to the penalties even if you close a mortgage midterm. If you sold your home during the mortgage term, the penalty amount is payable at closing.
But let's consider all we know now about mortgage life insurance versus other types. First, compared with other kinds of insurance, mortgage insurance costs more. And, there are a few other things to keep in mind.
This kind of insurance has a diminishing return. Your premiums won't change, but as your house gets paid down, the value of your policy goes down as well.
So, can you cancel your mortgage life insurance? The short answer is yes, but it comes at a cost. You shouldn't cancel your mortgage life insurance until the mortgage contract ends.
Is Mortgage Insurance Worth It in Canada?
The question of mortgage insurance comes down to type. Each has its features.
The funds paid out from mortgage life insurance only go to the mortgage. Other types of insurance pay in cash to the beneficiaries, who can choose where the funds are best spent.
The mortgage life insurance cost with homeownership may seem cheaper. But, consider what happens when you want to put a lump sum payment on your mortgage. The reduction in mortgage amount again reduces the value of the policy.
If you were to end the term of your mortgage, you would also lose the value of the insurance policy. AT such time, however, you can renegotiate a policy with a new mortgage.
By comparison, personal life insurance policies are adjustable. Therefore, they can change as your needs change, and they retain their original value for the policy's life.
In the unfortunate circumstance of death, the policy gets paid to the beneficiary. They are then free to choose how to allocate the funds.
The difference with mortgage insurance is the risk involved to lenders. Many young people want to get into the housing market with as little down as possible. That is our financial reality.
So, with a 20% down payment or less, buyers get mortgage insurance provided through CMHC. Bear in mind; these policies are designed to protect the lender in case of default. They do not provide benefits to surviving family members.
So, when asking whether mortgage insurance is worth it in Canada, the answer depends on two things. First, if the purpose of the insurance is for protection against higher risk, then the answer is yes.
But, if it's a question what type of insurance serves your family needs better, only you can decide that.
Is Mortgage Insurance Mandatory?
Organizations like CMHC exist to protect lenders from extreme risk. But, they also function to help people become homeowners. More and more today, it is difficult for first-time buyers to put down a large down payment.
Lenders try to mitigate those risks with mortgage insurance.
So, is Mortgage Life insurance mandatory in Canada? The truth is no; it is not.
Having said that, there are things to think about when buying a home. For example, you can look for the best mortgage insurance in Canada or accept the risk.
Either way, it's worth doing a little more research. So, give us a call and get a free quote today.
