Why Mortgage Insurance Is a Must
As per records from the Bank of Canada, household debt on Canadians amounts to more than $2.17 trillion. interestingly, most of this debt is residential mortgage.
Home is one of the biggest assets one may own. One would go to lengths to protect it. But, is there a way to ensure that this prized possession is always secure and that your loved ones always have a roof above their heads, especially if something was to happen to you? There certainly is, and we are going to talk about it.
One can get mortgage insurance from an insurance company or from a financial institution along with the life insurance or critical illness insurance.
Most mortgage insurance policies are designed to pay out the full amount of your original mortgage, no matter how much you owe. Mortgage protection
Mortgage protection, however, offers a mix of insurance policies to protect you:
- Term life insurance: It offers life cover for a set period (10, 15, 20 or 30 years). It can work if you want low-cost insurance to begin with because the premium is usually low for the first term (especially when you are young, the cost increases upon renewal for the next term. So, buying coverage for a term that matches your mortgage term is a great idea.
- Permanent life insurance: It is usually more expensive than term insurance, however, the cover is fort life and the cost thereafter remains fixed irrespective of your growing age or worse off health.
- Critical illness insurance: It allows you a one-time payment. In case you are detected to be suffering from a serious illness that has been covered by the policy, it is paid off. This money can be used to pay for medical expenses, to pay off the mortgage or any other liability that you may have.
How Are Mortgage Insurance, Mortgage Protection and Life Insurance Different?
In the case of mortgage insurance, the claimed payment goes to the lender. As your mortgage balance declines, the coverage amount also declines
In the case of mortgage protection, it is the critical illness insurance that grants you a one-time payment which can be put to a use that you deem best: paying off your mortgage or any other expenses that you need to pay off.
In case of your death, life insurance will pay a tax-free amount to your beneficiary. This payment is enough to cover more than just mortgage. That way your survivors can use the money for other liabilities as well.
Here are three aspects in which these three are different:
Mortgage insurance gives the money to the lender and not the insured. When critical illness insurance pays, the recipient is you, the insured. In the case of life insurance, the payment against the claim is made to the beneficiary.
In case you end up changing mortgage lender, the mortgage insurance will not move with you by default. You will need to prove your health is still fine and you will be required to pay mortgage interest rate at whatever the new provider offers.
With critical illness as well as life insurance, changing the mortgage provider doesn’t make a difference. Your policy still remains the same and you do not need to re-apply or even prove that your health is fine so as to be insured.
When you buy mortgage insurance from a lender, there is no scope for changing the coverage as your requirements change over time.
Nevertheless, with mortgage protection, you can easily convert term life insurance and term critical illness insurance to permanent plans.