Buying a home is a major financial decision, and it can be very confusing when it comes to the types of insurance you may or may not need when you get a mortgage.
If you’re unsure about mortgages and insurance, here are a few questions to ask yourself:
Do you need insurance to get a mortgage?
When you buy a home, there are three major types of insurance that you may or may not be required to purchase. Home insurance—also known as homeowners’ insurance—is a type of property insurance that covers damage to your residence as well as your belongings. Most lenders require you to get home insurance before they will give you a mortgage.
There are also two other types of insurance that are related to your mortgage:
- Mortgage protection or mortgage life insurance is usually sold by your bank or lender. With mortgage life insurance, the remaining mortgage balance will be paid off if you pass away. There’s also mortgage disability insurance that takes care of your mortgage payments in the event you become disabled. Some lenders may also offer critical illness and job loss insurance. All of these products are sometimes sold separately or together. Some insurance companies also offer these products that you can purchase after you get a mortgage.
- Mortgage default insurance protects your lender in the event you can’t pay because lenders need protection, too! It’s issued by the Canada Mortgage and Housing Corporation (CMHC), Genworth Capital, or Canada Guaranty. Mortgage default insurance is also commonly referred to as CMHC insurance. This type of insurance is only mandatory if you make a down payment of less than 20%. The lender pays these premiums and passes these costs onto you. If you have a down payment of 20% or more, mortgage default insurance isn’t necessary.
Can you get a mortgage without life insurance?
Yes, you don’t need mortgage life insurance to get a mortgage. When you get a mortgage, many lenders will give you the option to buy this product.
If you choose not to buy, it won’t prevent you from being able to buy a home.
You can also get a mortgage without any other type of life insurance. It’s not required by law, nor is it required by any lenders.
Alternatives to mortgage life insurance?
There are alternatives to mortgage life insurance that are usually a lot less expensive. The best one is a standard term life insurance policy because you can choose the amount of insurance and the term you want.
Is mortgage protection insurance worth it?
Most people want life insurance to cover more than just their mortgage. In that case, a term life insurance policy is the better option. It’s less expensive, provides additional protection, and is more flexible.
Let’s say 30-year-old Christine is trying to decide whether or not to get mortgage life insurance or term life insurance. She decides to look at mortgage life insurance first. In terms of costs, mortgage life insurance for her will cost $33 at Scotiabank or $39 a month at BMO before tax on a $300,000 mortgage. In these cases, she has to get her insurance from the bank that provides the mortgage. The costs are the same for both smokers and non-smokers.
Christine, who happens to be a non-smoker, then looks at term life insurance and uses PolicyMe’s life insurance quote calculator. For a 20-year term, it will cost her $17.82 a month for a policy from Wawanesa Life, $19.22 a month for a policy from Manulife, and $22.59 a month for a policy from BMO. As you can see, she can get the same amount of coverage from a number of insurers for a lot less. Christine could also get more coverage for less than what her mortgage life insurer offers.
Another thing to keep in mind with mortgage life insurance is that the coverage amount declines each time you make a mortgage payment. On a $300,000 mortgage with an interest rate of 2.34% and monthly mortgage payments, Christine will pay off $8,950 in principal in one year. That means her balance will decline to $291,050. However, her mortgage life insurance will cover the $291,050 balance but her premiums will remain the same.
If you choose to get mortgage life insurance, both the mortgage balance and the amount of coverage will continue to decline over time. If you decide to switch mortgage providers at any time, you lose your coverage and have to buy insurance again. As you get older, the cost will often increase. Once the mortgage is completely paid off, you won’t have any coverage.
With term life insurance, the coverage amount is the same and the premiums will remain the same for the entire term. You can also purchase more coverage for less. And in the event of your death, the insurance proceeds can be used to pay down your mortgage or to fund your children’s education(s). It’s up to your beneficiary to decide, not your financial institution.