Whenever you plan to apply for a mortgage, you think about purchasing insurance, Right? Buying a home is expensive, and life insurance helps you to protect your assets. But, do you really need it in Canada?
Many believe that you need to buy life insurance before applying for a mortgage. That’s not quite true. Here’s why.
Do I need life insurance for a mortgage?
The simple answer is no. However, you may need other specific types of insurance in some cases. And it depends on the down payment and mortgage size. But, there is no need for life insurance to get a mortgage.
Instead, you can purchase term life insurance. It will help your family to continue the insurance if something happens to you. Sometimes, you may require mortgage default insurance, also called Canada Mortgage and Housing Corporation (CMHC), as a prerequisite under the mortgage terms and conditions.
RBC, for instance, has HomeProtector mortgage insurance that protects you in case of the death of the homeowner or even disability.
Type of insurance you need to get a mortgage
Sometimes house owners need a specific type of insurance depending on their mortgage. And it is default insurance or CMHC insurance, as mentioned earlier.
Now, why do we need it? Well, it is required when the down payment is less than 20% of the property purchasing price. You can also buy this mortgage default insurance from Genworth Financial Canada. It is a private mortgage insurer.
This insurance is specifically for lenders or banks but not house owners. Although, it is beneficial as it allows you to get a mortgage for up to 95% of your purchase price. It is helpful for people with poor financial condition to buy property without having a large down payment.
You must know—default on the mortgage for three months will allow the broker to take possession of the property and sell it. Lenders can also submit claims to CMHC on shortfalls.
Should you get mortgage insurance from the lender?
Mortgage insurance, also known as mortgage life insurance, is a protection product. It means the insurance will pay off the balance of your mortgage if you die for any reason.
In Canada, you can purchase it from a mortgage lender. But the problem is that you will not be able to choose the insured amount as it is added directly to the term and value of the mortgage loan.
As the mortgage is paid off, it will also decrease the amount of your coverage. Although, the premiums will not change. These costs will add up with the monthly mortgage payment.
Mortgage insurance is a bit expensive, as it is sold without underwriting. But it is helpful for people who are not eligible for term life insurance.
Moreover, it is not as flexible as term life insurance. With mortgage life insurance, insurers directly send the payout to the lenders. Your insurance will not provide any funds to the beneficiaries.
What is the best insurance to cover a mortgage?
So, what is the best insurance to cover your mortgage? Term life insurance will be suitable for you to protect the mortgage. It will give you coverage for a specific time that ranges between 10 to 30 years.
Buying any coverage for the long term will match with your mortgage coverage which is for about 20 or 30 years. So, term life insurance is best to protect your mortgage and help to keep your insurance costs steady.
Term life insurance premiums are not costly, especially if your health condition is good. Moreover, the payout is guaranteed because the underwriting processes are always completed when you qualify for the insurance.
Benefits you will get with term life insurance
In contrast to mortgage life insurance, which provides coverage based on the amount of your mortgage loan, term life insurance offers more coverage.
With term life insurance, you can choose a coverage that includes your income replacement, debts, and other requirements. You can pick beneficiaries for term life insurance, unlike mortgage life insurance, which pays lenders only when you die.
Wrapping up
Life insurance is not mandatory for a mortgage. Although you must know—it is a safe option to protect your asset. And if you want to go for some lender-offered mortgage, they are expensive and limited to the underwriting process as well.
So, the wise decision is to purchase term life insurance. It will match your mortgage term. And the best part? Budget-friendly and also provide security.
