What are mortgage life and mortgage disability insurance and what are they used for?

05 May 2021 by National Bank
Mortgage life and disability insurance

Buying property is probably the biggest investment you’ll make in your life. It also comes with its share of responsibilities, like having to pay off your mortgage every month. If anything should happen to you, would you be able to continue making your payments, even over a longer period? That’s the main advantage of mortgage life, mortgage disability and mortgage critical illness insurance. They help protect you and your loved ones so you can avoid any headaches should something unexpected occur. Here’s how these policies work. 

Why do you need to protect your mortgage loan or home equity line of credit? 

Amortization or repayment periods for mortgage loans can extend over 30 years in Canada, so there’s a strong chance that you’ll be paying off your debt for a long time. 

But no one is safe from the unexpected. In the event of an accident, illness or death, a related insurance policy on your loan protects your ability to pay off your mortgage in the same way other kinds of insurance protect the value of your assets (movable assets, car, boat, etc.) from damages. If you are unable to work due to health issues, this kind of insurance would allow you to continue paying off your mortgage and grant you peace of mind. 

What are the different kinds of mortgage or home equity line of credit insurance? 

There are three distinct types of protections available: 

  • Life insurance.
  • Disability insurance.
  • Critical illness insurance.

Life insurance is a pre-condition for the other two, meaning you need life insurance if you want to get disability and/or critical illness insurance. If you want to plan for every contingency, you can get all three. 

You can also sign up for only life insurance if you’d like. Basically, there are many different options depending on your personal and financial situation. You just have to define your needs first. 

What is the difference between mortgage life and disability insurance and CMHC’s mortgage loan insurance?

While many people think they’re the same thing, mortgage loan insurance and mortgage life, mortgage disability or mortgage critical illness insurance are very different things. 

Contrary to mortgage life, mortgage disability or mortgage critical illness insurance, which protect the borrower or borrowers (you) from unexpected events, mortgage loan insurance   – such as the kind offered by the Canada Mortgage and Housing Corporation – doesn’t offer any protection from death or health issues. Rather, this insurance protects your creditor (the bank) in case you default on your payments. Your lender is the one who is insured, not you.  

Mortgage loan insurance like the kind offered by the CMHC is required by banks when you buy a home and your down payment is less than 20%. The goal is to help you afford the property, but it also allows your bank to recover the money it lent you should you ever default on payments. 

What are the benefits of mortgage insurance?

There are many advantages to life, disability or critical illness insurance, should anything happen to you: 

  • Leaving a smaller financial burden to your family and help them avoid having to move or sell the property. 
  • Maintaining your quality of life: According to the Financial Consumer Agency of Canada, someone who’s insured by a workplace group insurance plan usually receives 60% to 85% of their salary in the event of disability. Mortgage disability insurance can help you stay afloat by covering the insured portion of your mortgage. In addition, it doesn’t impact other benefits you may receive. 
  • Helping you pay for your medical costs: If your condition incurs additional expenses such as hospital, medication or transportation fees, you’ll be in a better position to pay for these costs knowing that your mortgage is being covered by your insurance. 
  • Changing jobs without losing coverage: Since it isn’t related to the coverage offered by your employer, you’ll be protected at all times, even if you lose your job or while you look for a new one. 
  • Protecting your savings and maintaining your saving capacity without jeopardizing your projects. Without any financial protection, you may have to tap into your RRSP, for example. 

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How does mortgage life insurance work?

In the event of your death, your mortgage life insurance pays the remaining insured amount of your mortgage – up to $1,000,000 – directly to your bank instead of giving the money to your estate. This prevents delays and guarantees that the payout goes towards sparing your loved ones from another burden, while securing them a substantial inheritance in the form of your fully paid-up property.  

How is it different from personal life insurance? That kind of insurance will pay the money to your beneficiaries, who can use it however they would like – meaning there’s no guarantee that it will be used to pay off your mortgage. 

It may be a good idea to sign up for mortgage life insurance through your mortgage lender. It’s usually a fairly simple process. You will have to fill out a health declaration and you get a decision fairly quickly. In some cases, if you have a particular family history, you may be asked to undergo some medical tests. Regardless, honesty is crucial. False statements may lead to unfortunate consequences. 

If you need to make a claim, this will also be simpler as the bank already has all the information it needs to issue a refund. That way, you’re saving your loved ones from the fuss of gathering all the documents required by your personal life insurance company.  

How do you calculate mortgage life insurance premium and how much does it cost? 

The premium depends on your mortgage loan or home equity line of credit, your amortization period, your age, and your habits (like whether you smoke or not). For an idea of the costs, we recommend speaking with your bank. 

How do you know if you’re eligible? 

To sign up, you just have to be between 18 and 64 years old, be a Canadian or American resident, and be a borrower, a co-borrower, or a bondsman (someone who acts as a surety for the loan). 

How do mortgage disability and mortgage critical illness insurance work?

Disability insurance

Rather than paying you a lump sum, mortgage disability insurance compensates for your loss of income while you’re unable to work due to an accident or illness. 

If you don’t have adequate coverage, you may need to tap into your savings to afford your daily expenses while you recover. 

Critical illness insurance

Mortgage critical illness insurance offers a lump-sum payment. This money goes towards your mortgage to ensure you can continue paying it off. 

The important thing to remember is that on top of all their everyday financial responsibilities – mortgage, groceries, child-related expenses – people with an illness may also have additional medical expenses. For example, someone with cancer may have to travel outside of their hometown to receive treatment, which would incur transportation, lodging and food costs for their loved ones. Also, some prescription medication may not be covered by provincial public drug benefit programs. So you’re better of protecting yourself to avoid a large bill.  

What kind of protection do you get with this kind of insurance? 

Disability insurance offers up to $3,000 a month. Please note that your disability insurance contract has a 60-day waiting period, which means you may have to wait until the end of this period before receiving any benefits. 

For critical illness insurance, the maximum insured amount is $150,000. This will allow you to pay off your mortgage in part or in full. 

Here’s a tip: someone who becomes disabled due to a critical illness may receive both benefits. It’s not one or the other. 

What illnesses are covered?

It’s important to understand what’s considered a disability and what’s considered a critical illness. 

A disability is anything that prevents someone from earning an income. This includes common physical disabilities like an injury, whether it’s the result of a workplace accident or not, as well as psychological issues, such as burnouts, anxiety, and depression – so it’s not just physical injuries. 

Critical illnesses include severe medical conditions such as heart attacks, strokes and cancer. The important thing to remember for this kind of coverage is that it has to be a life-threatening illness. For example, stage 1 breast cancer won’t be covered because it’s too early. However, if it continued to develop and became life-threatening, you would then be able to open a claim. 

Other types of illnesses, such as degenerative diseases, may also be covered. It’s very important to take the time to read all the details. Feel free to ask any questions you may have to an insurance specialist. 

For these two protection policies, the cost of the monthly premium also depends on your age and your loan amount. 

How do you sign up for life, disability or critical illness insurance on your mortgage or home equity line of credit? 

First of all, keep in mind that you can sign up for all three protection policies when you get a mortgage loan, when renewing your loan, or anytime during the term of the loan. It’s never too late. Talk it over with your bank advisor – they will be able to help you. 

You can sign up for these insurance policies with the bank that’s issuing a mortgage loan or home equity line of credit to you. You can also contact a financial security advisor to get personal insurance. You may already have one or several of these insurance policies. If that’s the case, it would be a good idea to take inventory of your policies with other insurers before contacting an insurance advisor. 

We’re here to answer your questions. 

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