Buying a home is exciting… It’s also a huge financial commitment, especially when you’ll be carrying the cost of a mortgage over several years.
Few of us care to contemplate the worst. Yet protecting our loved ones from finding themselves in financial difficulty following an interruption in family income due to disability, serious illness, or death is essential.
Initially, taking out mortgage insurance with your lending financial institution may seem like the best way to protect yourself; however, individual coverage may also be advantageous.
Keep in Mind
Mortgage insurance isn’t the same thing as an insured mortgage. An insured mortgage refers to additional protection (with the CMHC, for example) a financial institution requires when a borrower doesn’t have a downpayment corresponding to 20% of the property’s value. It takes the form of a premium paid by the borrower.
Mortgage Insurance vs. Individual Coverage
You should therefore either purchase mortgage insurance or personal insurance (life insurance, disability, or critical illness insurance) to protect yourself as a mortgager against a sudden setback.
How Each Option Works
- When you take out mortgage insurance directly with your mortgage lender, you pay the premiums, but the financial institutions are the beneficiaries. In the event of death, the insurance will reimburse the outstanding balance on the loan, and, in the event of disability or serious illness, cover the monthly payments.
- With individual life insurance, a fixed amount is paid to your beneficiaries (spouse, children, etc.) in the event of death, giving them more freedom to spend the funds according to their needs (paying off the mortgage, covering other expenses, etc.).
There’s another point to bear in mind when purchasing mortgage insurance from a financial institution. Borrowers may find themselves obligated to stay with their lender if they fall ill before they can pay off their loan since it will become difficult to obtain insurance elsewhere. This means they won’t be able to shop around for a new rate and new conditions, which might have been possible if they had protected themselves with individual life or disability coverage.
Why You Need Insurance as a Homeowner
As a homeowner, not honouring your mortgage payments can lead to serious consequences. This is why choosing one of the insurance policies mentioned above is so important.
Moreover, if you have access to group insurance through your employer, review the coverage included with a financial security advisor to determine whether it’s adequate and sufficient for your needs. You can then supplement it, if necessary, with individual coverage.
Good to Know
Life and disability insurance policies, as well as mortgage insurance, can usually be cancelled at any time.
An Emergency Fund: Your Safety Net
Ideally, you should also build an emergency fund equivalent to 3 to 6 months’ salary so you can continue paying your mortgage in the event of a temporary setback without having to consider selling your home.
Your Will and Estate Plan
Another option to protect yourself and your loved ones is to have a will, which will greatly simplify the management of your estate in the event of your death. Consult our article on this topic!
You should likewise make sure your life and mortgage insurance coverage align with your estate planning to prevent complications, particularly if you own an income property. Among other considerations, you’ll have to account for the tax implications at death to avoid leaving your heirs with a hefty bill.
By taking these precautions when purchasing your property, you can proceed with confidence!
