What is mortgage protection insurance?
Mortgage protection insurance is an optional insurance plan offered when you take out or renew a mortgage. However, you don’t need to buy this insurance to be approved for a mortgage. This insurance can help pay off or reduce your mortgage balance if you pass away or develop a serious illness. It can also help with mortgage payments for a while if you become disabled, critically ill, or pass away.
How does mortgage protection insurance work?
With mortgage protection insurance, you pay a monthly premium to your lender to keep your coverage active. If you pass away while the policy is active, the insurer will cover your mortgage payments. Some companies pay off the entire mortgage, while others only cover a portion, so it’s crucial to understand what’s in your policy agreement.
Most insurance plans come with several conditions, including specific lists of illnesses or injuries that they cover or exclude. Pre-existing health issues are often not covered. These details are explained in the insurance policy. Again, make sure to review the insurance policy before applying so you understand what is and isn’t covered.
There are different types of optional mortgage protection insurance, each one designed to help you find the best one that fits your needs and lifestyle. In Canada, mortgage protection insurance typically includes critical illness, job loss, life and disability insurance.
Critical illness insurance
Whether or not you can or cannot work, this policy pays off your remaining mortgage balance if you’re diagnosed with a covered critical illness. If you develop a condition like cancer, have a heart attack, or experience a stroke, mortgage critical illness insurance coverage can help pay off or reduce your mortgage balance.
If you develop a critical illness while having critical illness coverage, it takes care of your mortgage payments so you can use that money for other health needs, such as nursing care, physical therapy, medical treatment, home adjustments, and child care.
Job loss insurance
This policy helps cover certain debt payments if you suddenly lose your job. Job loss insurance can help pay your mortgage, personal loans, and credit card bills. Typically, this coverage only lasts for a short period and may have limits on how much money it will pay each month. The goal is to provide you with some breathing room and keep you afloat while you look for new employment. However, it’s important to review your policy to understand its specific terms, like how long the coverage lasts and how much it will pay.
Life insurance
Life insurance coverage, as part of mortgage protection insurance, specifically provides financial security for your mortgage in the event of the policyholder’s death. This insurance can be helpful if you have dependents or a spouse who would like to stay in your home after your death but may not be able to keep up with the mortgage payments.
Upon the policyholder’s death, the insurance company will pay an amount matching their remaining mortgage balance or a set sum. The payout goes straight to the lender to cover the remaining mortgage.
Disability insurance
Disability coverage helps cover your mortgage payments for a set time if you become disabled due to illness or injury. Mortgage disability insurance starts when you’re unable to work due to an illness or injury. The waiting period usually takes about 30 to 90 days, and then the coverage lasts until you can work again or until a set period is reached, typically about 12 to 24 months.
How is term life insurance different from mortgage insurance?
Term or permanent life insurance and mortgage life insurance are both forms of life insurance, but they have different purposes:
Term life insurance
With term life insurance, your chosen beneficiaries receive a lump sum payment if you pass away during the policy’s term. You decide on the amount of coverage based on your family’s needs, and your designated beneficiaries can use the payout for anything they need, whether that’s paying off the mortgage, covering daily expenses, or investing.
Depending on the policy type, premiums might either stay fixed or increase as you age. They are calculated based on factors like your age when you apply, your gender, your medical history, and the amount of coverage you requested.
Mortgage life insurance
Mortgage life insurance is more focused. It aims to pay off or reduce your mortgage balance if you pass away. In this case, the mortgage lender is the beneficiary and receives the payout directly to cover the outstanding mortgage. The coverage amount matches your mortgage balance and decreases as you pay down the loan. This payout can only be used to reduce or clear your mortgage.
As you pay off your mortgage, your insurance premiums usually stay the same, even though your mortgage balance decreases. The premiums are determined based on your age and mortgage amount when you apply.
How much does mortgage protection insurance cost?
The cost of mortgage protection insurance depends on several key factors, such as the remaining balance, the length of the mortgage term, and the overall risk factors:
Remaining mortgage balance
The cost of a mortgage protection insurance policy largely depends on how much you still owe on your mortgage. When you first take out a mortgage , the outstanding balance is at its highest, leading to higher insurance costs. The larger your remaining loan, the higher your monthly premium will be. On the other hand, if you made a substantial down payment initially, the remaining balance is smaller, which generally leads to a lower premium. Also, if you choose to renew or refinance your mortgage loan, keep in mind that you may have to renew your policy.
Length of the mortgage term
How long your mortgage term is directly affects the cost of the policy. For instance, if your mortgage term is 30 years instead of 15, the premiums could be higher because there’s a longer period during which the insurer might have to cover payments. However, it’s important to note that this coverage is strictly tied to the mortgage. If you pay off the mortgage entirely before passing away, no payout will go to your heirs, unlike with a traditional life insurance policy.
Overall risk factors
Like traditional life insurance, the cost of mortgage protection insurance is influenced by factors such as age, occupation, and overall risk level. Younger individuals often pay lower premiums due to a reduced risk of illness or death. Additionally, people with high-risk jobs or significant health concerns may have to pay more for coverage. Insurers use this information to gauge the likelihood of making a payout and adjust premiums accordingly.
Your coverage options
Some policies offer additional features or riders that can increase the cost. For example, a policy that includes critical illness or job loss coverage may have a higher premium than one that simply covers death. The more comprehensive the policy, the higher the cost is likely to be.
Mortgage Insurance vs. Bank Mortgage Protection
Since most mortgages are taken out from banks, they also offer mortgage protection to complement your loan. Unlike an independent mortgage insurance plan, the benefit from these bank-sponsored policies decreases as you pay off your mortgage. Further, your dependents are not eligible for additional benefits from premiums paid. If you need to renew your mortgage, you are also required to requalify for the protection plan.
An independent mortgage insurance policy places financial control in your family’s hands. They can allocate the benefit according to immediate and future needs, so they are guaranteed both home security and at least partial income replacement to afford living expenses. Your policy also remains in effect even if you switch lenders to avail of lower rates, with fixed premium rates, unless you actively choose to reduce the coverage amount based on your needs.
| BrokerLink |
The Bank |
| Protects your family |
Protects the bank |
| Gives you a choice of amount of coverage – you choose the amount of coverage you require and the coverage does not decrease as the mortgage is reduced |
No choice of coverage amount – coverage must be equal to the mortgage and has a declining balance (decreases as the mortgage is reduced – the price does not!). |
| Underwritten at time of application |
Underwritten post claim |
| Gives you control – you own the policy, choose the beneficiary and select the type of coverage you want. |
Policy controlled by the bank – the bank is the beneficiary. |
| Is fully portable – your plan will continue when you move and you don’t have to buy a more expensive policy (if you are older). |
Not portable – protection runs out when the house is sold or traded. |
| Provides flexibility – upon your death, your family has the option of paying off the mortgage or investing the funds if the economic conditions warrant it. |
Inflexible – the mortgage must be paid off upon death regardless of other investment opportunities. |
| Offers you a choice of plans and benefits – you choose the type of policy and benefits you want |
Limited choices – limited plans and benefits offered and no conversion privileges |
| Allows shopping for interest rates – upon renewal, you are not tied to one lending institution and can shop around for a better mortgage rate. |
No shopping – unless you are willing to pay a higher premium and are insurable. |
| Provides stable coverage – BrokerLink Life plans have built in grace periods from 30 to 90 days for missed premiums. |
No stability – a missed payment often means lost coverage. |
| Coverage is renewable & convertible – term plans can be renewed after the initial term or can be converted to a permanent plan without a medical. |
Non-convertible |
| Expert advice – you deal with a professional insurance advisor and all your coverage can be through one broker. |
No expert advice – you deal with a banker about insurance matters and your coverage is spread all over. |
Why might my mortgage insurance claim be denied?
Valid mortgage insurance claims can be wrongly denied in Canada for several reasons. Here are some common reasons why this might happen:
Misrepresentation
Insurance companies rely on accurate information to evaluate claims. If the insured person provided incorrect or incomplete details during the application, like leaving out important medical history or personal information, the insurer may deny the claim due to misrepresentation. This means it’s crucial to be truthful and thorough when applying.
Policy exclusions
Every policy has specific exclusions that outline what isn’t covered. For instance, pre-existing medical conditions are often not covered if they were known before the policy was bought. So, if the death or disability was due to one of these excluded conditions, the insurer could refuse to pay.
Failure to meet requirements
Policies usually have specific requirements that must be met for claims to be valid. For example, the insured person might need to have been employed at the time of claim or must notify the insurer within a specific time frame. If these requirements aren’t met, the insurer can deny the claim.
Lapsed or inactive policy
If the insured person stops paying premiums, the policy can lapse (expire). Without an active policy, the insurance company isn’t obligated to cover claims. Also, if the policy was cancelled or terminated before the event that caused the claim, the insurance company won’t pay out. This could happen if the mortgage was paid off, the insured person chose to cancel the policy, or it expired for any reason.
Fraud
If the insurance company finds that the claim involved intentional fraud, like exaggerating injuries or lying about the cause, they can deny the claim outright. This is why being honest about the claim details is essential.
Policy interpretation disputes
Sometimes, there are disagreements between the insurance company and the insured person about what the policy covers. The insurer may interpret the policy differently and believe the claim doesn’t meet the terms. This can lead to disputes and denied claims.
How to purchase mortgage protection insurance in Canada
When you arrange your mortgage, the lender might offer a mortgage insurance policy. If they don’t, you can ask your realtor or the lender’s representative to suggest a company that provides it. You can also buy mortgage protection insurance through other insurers or brokers, as many life insurance companies also offer it.
Homeowners should know that there may be a time limit to buying a mortgage protection insurance policy after purchasing a home. Some companies require you to buy it within 24 hours of closing the sale, while others give you up to five years. Therefore, if you’re shopping around for the best deal, working with an insurance broker may help speed up the process if you’re facing a short time limit.
What other types of insurance do homeowners need?
As a homeowner, it’s essential to consider a variety of insurance types, such as home insurance, condo insurance and high-value home insurance, to ensure your property is well-protected. Here are some key insurance policies that homeowners should be aware of:
Home insurance
This is the standard insurance every homeowner should have for their primary residence. It protects your house against damage from hazards like fire, storms, and theft. It also protects you from legal costs if someone gets hurt on your property. Without home insurance , the costs of repairs or rebuilding would come straight out of your pocket.
High-value home insurance
If your home is particularly valuable or luxurious, regular home insurance might not offer enough protection. High-value home insurance provides extra coverage for high-end features, expensive structures, and valuable possessions like fine art, jewellery, or collectibles. It ensures your luxurious home is adequately protected in case of damage or loss.
Tenant insurance
If you’re renting your home or apartment, tenant insurance is crucial. It protects your personal belongings, like furniture, electronics, and clothes, from damage or theft. If a fire or water leak ruins your stuff, tenant insurance can help replace it. It also covers legal costs if someone gets injured inside your rented space.
Condo insurance
For condo owners, the building’s master policy only covers common areas and external structures. Condo insurance fills this gap by covering your personal belongings and improvements inside your unit, like upgraded flooring. It also protects you from legal costs if someone is injured in your condo or if you accidentally cause damage to another unit.
Vacation property & cottage insurance
Cottages and vacation homes need special coverage because they face unique risks. Cottage insurance provides protection against damage when the home isn’t occupied for long periods, like during the off-season. It also offers liability coverage for guests or renters who visit your vacation property.
Protect your mortgage with BrokerLink
Deciding what type of mortgage protection insurance you need can be a significant decision. You not only want to explore your options thoroughly but also make the right choice that offers the best coverage for your needs.
Choosing the right home insurance is equally important. If you’ve moved into a new home and haven’t secured coverage yet, reach out to one of our dedicated BrokerLink agents. We’ll help you find a home insurance policy that suits your needs. Our team has extensive knowledge of various home insurance products and provides expert advice. We’ll also compare different policies from top insurance companies to find the best one for you.
You can reach us by phone, email, or in person at any one of our locations throughout Canada. No matter how you choose to get in touch, a BrokerLink insurance advisor will be happy to assist you. We also encourage you to take advantage of our free online quote tool that can provide you with a competitive quote in minutes.
1-888-768-8001
FAQs
Why should I get my own mortgage insurance instead of taking what’s offered by the bank?
Mortgage Insurance protects you, not the bank. With your own policy, you choose the beneficiary and select the type of coverage you want. In addition, the amount of coverage offered does not decrease as you pay down your mortgage.
My bank only asked me four health questions for my mortgage insurance, why are there so many questions for individually owned mortgage life insurance?
With many banks, their version of mortgage life insurance operates on a principle known as post underwriting. This means that if you pass away, they will then look at your medical history to determine your health status at the time of application. However, individually owned mortgage life insurance completes all of the underwriting upfront so that once you are covered, you are covered.
Can I keep my mortgage insurance if I move?
Yes, one of the benefits of individually owned mortgage life insurance is that it is portable regardless of which lending institution you chose to deal with.
