To understand life insurance against a home loan, it means taking a look at mortgage insurance, then comparing the two.
What is Mortgage Insurance in Canada?
Mortgage insurance is another name for life insurance against a home loan. It protects the lender if the person who took out the mortgage dies.
Is it a Legal Requirement to Have Life Insurance for a Mortgage?
It may be a legal requirement to have life insurance against a home loan. It all depends on how much of a down payment an individual has. If the down payment is less than 20% then the home buyer will have to have mandatory life insurance which is provided by an organization called Central Mortgage Housing Corporation or CMHC.
Central Mortgage Housing Corporation
This entity will insure that the balance of the mortgage owed will get paid out if the homeowner has been compelled to have this type of insurance. It takes place upon the death of the insured.
How Much Does This Insurance Cost?
How much it is going to cost is again going to depend. On average the cost of the premiums ranges anywhere between 2.80% and 3.15%. Most individuals, once they have arranged their mortgage, don’t even realize the cost of this insurance. It gets blended in with the mortgage. The only advantage to this type of insurance is it gives some home buyers the opportunity to be a homeowner. Not everyone can afford to put down 20% or more on their downpayment.
Other Options for Less Than 20% Down Payment Home Buyers
CHMC is the most well-known life insurance provider for mandatory home loan insurance. But, there are others.
This company is a private mortgage insurance company. They work in the same way as CMHC does and offer the same rates.
This is a third option for the mandatory life insurance coverage.
Most likely the lending institution will determine which of these three options they are going to go with. Being as they are the ones at risk here. Also, the fact that the premiums costs are exactly the same. It means it does not affect the home buyer.
Is There a Difference Between Mortage Insurance and Homeowner’s Insurance?
With so many different types of insurance, it is easy to get confused as to which type one should invest in. The reality is when it comes to homeownership there are few different types of insurances. Ones that need to be considered.
In most cases, the lender is going to insist on the homeowner having mortgage insurance. This is to protect the lender. In the case of the death of the homeowner. That way the mortgage insurance is going to cover the balance owing on the mortgage.
This is a different type of insurance. But, is related to the home as well. This type of insurance protects against property damage. In the event, something happens to the house and property. Like a fire or flood. Or some acts of nature.
Buying Optional Mortgage Life Insurance
If one does not fall into the mandatory range for mortgage insurance, there are still options. These options are voluntary.
Many individuals obtain their mortgage through banks. Many banks are now offering the opportunity to buy life insurance directly through them. They may have become affiliated with a well-known life insurance company. Or, perhaps they have formed their own mortgage life insurance company.
The Advantages that are Promoted for This Type of Insurance
- It is convenient
- One doesn’t have to go shopping around for life insurance
- The payments usually get blended in with the mortgage payments
What are The Real Disadvantages
There can be some potentially serious disadvantages to this type of home loan life insurance buying.
- The insured is not getting the chance to shop around for better rates
- The insurance coverage is only going to cover the balance of the mortgage owed if the insured dies.
- The premiums don’t reduce as the mortgage reduces from the payments made on it.
- There is a good chance of the payout of the mortgage life insurance being denied. There is a reason for this.
Under normal circumstances when one is buying life insurance, they are fully screened during the application process. Then the insurance policy gets underwritten at that time. So the insured has been qualified for the insurance coverage.
With mortgage life insurance through the lending institution, the process may be different. Quite often the underwriting doesn’t take place until a claim is made. At this time the insurance provider may come up with reasons why the insured doesn’t qualify.
Policy renewals take place each time the mortgage is renewed. It may seem like because the mortgage is less so will the premiums. This is not necessarily the case. Life insurance factors in age. The home buyer is now a few years older at the time of the mortgage renewal. This is also going to be taken into account with the new premiums.
Is Mortgage Life Insurance Worth It?
Mortgage life insurance is worth it. But, only when one goes about buying this type of home loan life insurance the right way.
The Right Way to Buy Mortgage Life Insurance
There are many different life insurance companies in Canada that sell life insurance. What is done with the money when it comes time to pay it out is not the insurance company’s concern. Individuals can buy enough life insurance to cover the cost of their mortgage upon their death. Plus to cover other additional debts.
Buying enough life insurance to cover the cost of the mortgage is much more effective. Also, a cost-effective way of making sure the mortgage gets paid. The beneficiary can take the proceeds from the life insurance and pay off the mortgage. Anything extra can be used as determined by the beneficiary.
The benefits of buying life insurance outside of mortgage insurance are…
- An individual can choose which insurance company they want to do business with.
- The application process will make sure the insurance shopper is qualified properly.
- An individual can choose how much insurance coverage they want.
- The value of the insurance policy is not going to change.
The insurance shopper has many more options for the type of insurance package they want. They can choose ones that will cover their mortgage. Plus, have the opportunity to include it as part of their investments. Or, use part of it towards their savings.
To buy life insurance in the right way, it means becoming insurance savvy.