Canadians owe $2.06 trillion in household debt, according to the Bank of Canada, 2/3 of which is residential mortgage debt. To protect these mortgages, homeowners have options: mortgage insurance provided by a financial institution, or mortgage protection using life insurance and critical illness insurance provided by an insurance company.
Mortgage insurance works by paying off the outstanding principal balance of your mortgage should you die. It will pay the monthly payment, if you are not able to go to work, due to an accident or sickness, or pay a lump-sum amount if you get diagnosed with one of the listed illnesses.
This insurance is also offered by the banks. But most times, no medical is conducted at the time of setting up the contract. But medical insurance is reviewed at the time of processing the claim.
This results in a lot of denials from the insurance as well. Whereas, while getting this protection offered by a licensed professional, you will go through the medical testing upfront. Hence, giving you the peace of mind that you will be paid at the time of and unforseen event.
Like described above, Mortgage Insurance can combine a number of insurance products to protect you, i.e. Life Insurance, Critical Illness Insurance, and Disability Insurance.
The main difference between mortgage insurance and mortgage protection using life insurance and critical illness insurance is that mortgage insurance pays the lender, and the coverage declines as your mortgage balance declines. On the other hand, critical illness insurance pays you a lump sum you can use to pay your mortgage or other expenses as you choose. Life insurance pays a tax-free sum of money to your chosen beneficiary(the person who receives the benefit) when you die. The payment can cover more than just the mortgage, as the beneficiary may use the proceeds of the policy in any way desired.
In the case of mortgage insurance from the lender in most cases, the lender may get you to check off a few boxes for your medical questionnaire. But when the time comes for a claim, the insurance company will look at your medical records in detail and there have been a lot cases when the claims have been denied through the banks because they found out that you didn’t answer the questions correctly, even if you didn’t understand them.
When you purchase your private mortgage insurance, all of the medical insurabilty is proven upfront and the necessary medical testing is done along with a detailed questionnaire completed with the help of a licensed insurance practitioner, leaving you at ease that when the time comes for claim, there is a good chance that it will be paid off as suggested and agreed upon.
With mortgage insurance through a lender, your needs may change over time, but you don’t have the flexibility to change your coverage. Term life insurance and term critical illness insurance plans can be converted into permanent plans at a later date.
With a lender-offered mortgage insurance plan, the benefit decreases as you pay down your mortgage, but the premiums remain the same. If you pay off your mortgage, you lose all your coverage. With life and critical illness insurance policies, the amount of coverage does not decrease over time (even if you repay your mortgage).