Why protect your mortgage loan or home equity line of credit?
The amortization or repayment period for a mortgage loan can reach up to 30 years in Canada. So, there’s a good chance this debt will follow you throughout a large part of your life.
No one is impervious to the unexpected. Just as you can insure your assets (belongings, furniture, car, boat, etc.) against potential damage, mortgage loan insurance guarantees the repayment of your debt in case of accident, illness or death. Can’t work because of a health issue? This type of insurance allows you to keep up with your mortgage payments, while providing you with peace of mind.
What are the different types of insurance for a mortgage loan or home equity line of credit?
There are three different types of protection:
- life insurance
- disability insurance
- critical illness insurance
Life insurance is a prerequisite to the other two, which means you need to have it to be eligible for disability or critical illness insurances. It’s also possible to combine all three and be prepared for just about anything.
You can choose to subscribe exclusively to life insurance as well. Several options are available depending on your personal and financial situation. The first step is defining your needs.
What’s the difference between this type of mortgage loan insurance and the mortgage loan insurance offered by the CMHC?
Although they’re often confused, they are actually two very different types of protection.
As opposed to life, disability or critical illness insurances, mortgage loan insurance, such as the one offered by the Canada Mortgage and Housing Corporation (CMHC), does not offer you compensation in case of death or health problems. It protects your financial institution against an eventual missed payment on your part. It insures your bank, not you.
CMHC mortgage loan insurance is required by financial institutions when you buy a house with a down payment of less than 20%. Its purpose is to help you become a homeowner, while allowing your bank to recover the loaned money if you’re unable to pay it back.
What are the advantages of mortgage loan insurance?
There are many advantages to life, disability or critical illness insurance in case of health problems:
- Saving your family from a big financial burden: all while helping them avoid moving or selling your property.
- Maintaining your lifestyle: according to the Financial Consumer Agency of Canada, a person with access to group insurance at work generally receives between 60% and 85% of their salary in case of disability. Disability insurance on your mortgage loan helps you stay afloat despite a reduced income by covering the insured portion of your mortgage payments. This protection has no impact on your other benefits.
- Having enough money to cover medical fees: paying for hospitalization, medications or even travel is made easier knowing your mortgage payments are covered by your insurance.
- Changing jobs without losing your coverage: since this insurance is in no way related to what’s offered by your employer, you’re protected at all times, even if you’ve been laid off or while you’re looking for a new job.
- Protecting your savings and continuing to save without compromising on projects: without financial protection, you could have to dip into your RRSP, for example.
How does life insurance on a mortgage loan work?
In case of death, the insured amount on your mortgage loan – up to a maximum of $1,000,000 – is transferred directly to your financial institution instead of your inheritance. The payment is made without delay, your loved ones don’t have to worry about the mortgage and receive a substantial inheritance: your paid property.
How does a personal life insurance policy differ from this one? It provides a settlement amount to your beneficiaries that can be spent as they please. There is no guarantee that the money will be used to pay back your mortgage loan.
How is the premium calculated and what’s the cost of life insurance on a mortgage loan?
The premium varies based on the amount of your mortgage loan or home equity line of credit, the chosen amortization period, your age and lifestyle (if you smoke, for example). It’s recommended you check with your financial institution to get informed on the costs.
How do you know if you’re eligible?
To apply, you must be between 18 and 64 years old, be a Canadian or American resident, and have obtained a mortgage loan or be a guarantor on one (a person who assumes responsibility for the mortgage).
How does disability and critical illness insurance on a mortgage loan work?
Disability insurance
Disability insurance for mortgage loans isn’t given as a lump sum, but instead provides compensation for loss of revenue during a work stoppage caused by an accident or illness. It can complement the disability insurance offered by your employer.
Without this coverage, you may have to dip into your savings to accommodate your daily needs during your recovery.
Critical illness insurance
Critical illness insurance for mortgage loans offers a lump sum to put towards your mortgage.
If you get sick, you will probably have to pay additional health care fees on top of your regular costs of living, such as your mortgage, groceries or child-related purchases. For example, with a cancer diagnosis, you may need to seek treatments in another region, which would entail transportation, accommodation and food costs. Some prescriptions might not be covered by your provincial health insurance either.
It’s best to take the necessary precautions to avoid the bills piling up.
What kind of protection do you get with this type of insurance?
Disability insurance provides payments of up to $3,000 per month. Take note that there is a 60-day waiting period, which means you’ll start receiving benefits after that period.
For critical illness insurance, the maximum insurable amount is $150,000. This payment allows you to pay your mortgage in part or in full.
Good to know: a person who becomes disabled following a critical illness could be eligible for both benefits.
What illnesses are covered?
It’s important to understand what’s considered a disability or critical illness.
A disability prevents someone from working to earn an income. This includes common physical disabilities like injuries caused by a workplace accident, or not, but also psychological difficulties such as professional burnout, anxiety or depression.
Serious medical conditions like a heart attack, aneurysm or cancer are considered critical illnesses. Remember, the illness must be considered life threatening. For example, stage one breast cancer is not covered because it’s not advanced enough. Should it develop and endanger your life, you could make a claim.
Other types of illnesses, including degenerative diseases, may also be covered. Take the time to read the policy details and don’t hesitate to ask your insurance advisor questions.
For these two types of protection, the premium also varies based on your age and mortgage amount.
How do you apply for life, disability or critical illness insurance on a mortgage loan or home equity line of credit?
You can apply for all three types of insurance when you obtain a mortgage loan, at its renewal or any other moment during its term. It’s never too late to protect yourself.
It can be advantageous to apply for life insurance on your mortgage loan through your financial institution. The process is simple and you could even qualify for certain benefits or promotional offers. All you have to do is fill out a statement of health and the approval process is quick. In some cases, if you have a family history of illness, you may be required to have medical tests done. Honesty is key: false declarations can have serious consequences.
If a settlement is requested, the process is just as simple because your bank already has the necessary information for the repayment of your mortgage loan. This way, your loved ones don’t have to gather all the documentation an insurance company would require.
Talk about it with an advisor at your bank; they’re sure to help. You can also contact your financial advisor to get protection. If you already have one or more types of insurance, have that information handy when you reach out.
Want to know more about the different types of mortgage loan insurance?