Homebuyers have options to help protect their home in case of tragedy.
You’re finalizing your mortgage – a huge commitment that comes with a great deal of responsibility. It’s natural to be concerned that your family might lose their home if the income earner was no longer around to make the payments.
You have a couple of options, both involving affordable monthly payments. Lending institutions offer you mortgage insurance – also called creditor insurance – at the time you sign the mortgage. The other route is personal life insurance that you can buy through your financial security advisor.
Mortgage insurance is convenient. You can apply for insurance coverage at the same time you’re getting your mortgage. This insurance is used to cover the outstanding mortgage balance if you die. You can also include your spouse in the coverage.
However, it’s important to research the differences between mortgage insurance and personal life insurance to help ensure you’re giving yourself and your family the type of insurance protection that meets your needs.
You do have to qualify for personal life insurance, a process that may include verification that you and your spouse are in good health. Once you start paying the premiums, you’re covered for the term of the policy, with automatic renewals. And as long as premiums are paid as required, only you can cancel the policy.
The benefit payout
With mortgage insurance, your creditor is the named beneficiary and the proceeds are paid to the creditor, not your family. If you or your spouse dies, the outstanding amount is paid off. As the mortgage is paid down the benefit coverage decreases.
Personal life insurance allows you to choose your beneficiaries. And the lump-sum benefit payment is paid tax free on the death of the life insured even if the mortgage is paid off. This type of coverage provides added financial security beyond just the mortgage.
With mortgage insurance, the coverage decreases each month until the entire principal is paid off and the premiums stay the same. With personal life insurance, your coverage doesn’t decrease as the mortgage is paid down and you can choose a plan that will keep the premium you pay level for 10, 20 years or for your lifetime.
Generally, most lending institutions offer non-convertible term life insurance where the lending institution owns the mortgage insurance policy. If you switch mortgage lenders, your policy is void. Given that you’ll be older than when you originally signed your mortgage or your health may have changed, the premiums with a new lender could be higher or you may not qualify for new coverage.
If you already have a personal life insurance policy in place and you buy a bigger home, you may want to consider increasing the coverage. One option may be to leave the existing policy in place and take out a second one to increase overall coverage for your family.
Take time to compare and carefully weigh both options. A financial security advisor can provide expert guidance.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.