All this Talk of Insurance is about to make my head explode.
All this Talk of Insurance is about to make my head explode.
I think this topic can be one of the most confusing topics out there, especially for first-time buyers. Your realtor tells you about one kind of insurance, your banker tells you about another; even grandpa is getting in on the action telling you that insurance is for pansies. It’s all a lot to take in and make sense of.
I’ll try my best to break it down below without making your noggin’ explode – and if it does, well…hopefully, you have coverage for that (lol see what I did there?)
Mortgage Default Insurance
This is government-mandated insurance that his required when a borrower has less than a 20% down payment. This insurance directly benefits the lender (not you) so if you should default (meaning flake off and not pay your mortgage) the lender would be protected against taking the loss. The premium is paid by the borrower (you) and is generally added to the mortgage balance. It was designed to help get borrowers with low down payments into the market, and simply put it is just one of the costs of doing business if you’re not at 20%, or if you are wanting to purchase a specialty home (i.e. mobile/modular homes in most cases) this insurance is required.
Home insurance
I've been burning, yes, I've been burning
Such a burden, this flame on my chest
No insurance to pay for the damage
Yeah, I've been burning up since you left
If Sam Smith were a house then he’d be in some serious trouble, because whether you’re purchasing a house, townhouse, or condo this type of insurance is mandatory. In the same way, you must get insurance on your car to legally drive it around town, your lender will need this coverage in place so that if something happens the property can be rebuilt/replaced and its value restored. Even with refinance transactions it is mandatory to show proof of valid home insurance (and if you’re in a condo you’ll need to provide both content insurance and the building policy from the strata). You can buy this coverage from any provider that you like and there are many quote comparison calculators online. But more than this coverage being mandatory, it’s necessary so that you know your home and belongings are protected. This type of coverage can also include things like personal liability (if the Amazon delivery guy slips on the black ice you haven’t cleared from the driveway) and additional living expenses (like the cost of a hotel should you need to vacate the home due to damage).
Mortgage Creditor insurance
This is a product offered by banks and credit unions that covers the debt (not you specifically) which means that the beneficiary of the policy is actually the lender. Generally, life, disability and/or critical illness are offered and it’s a simplified approval process often with only a few health questions. The creditor protection is a group insurance policy, meaning that the rates are usually based on only a few factors (such as age, gender, smoking status). It can be a great option for some, but there are a few key things to keep in mind. Because it’s a simplified approval process, for some individuals who are in good health it may be more expensive than it needs to be. In addition, because it is attached to the debt if you decide to move your mortgage to another lender in future you (in most cases) cannot take the policy with you, which would mean you’d need to re-qualify at an older age (more expensive) and any new health issues would need to be disclosed. Lastly, it’s important to remember that the premium stays constant while the size of the debt goes down. For example, if you insured your mortgage at $300,000 and you’ve paid it down to $150,000; if something happens to you then only the $150,000 balance is paid off (the extra isn’t paid to your family/estate).
I’m not saying don’t get creditor insurance, I think it can be a great complement to other coverage and makes perfect sense in some situations – but in others it may not. Say for example you’re the primary earner in the family, you don’t have a lot of savings and you have some known health issues. This may be an ideal product for you due to the simplified qualification, as going through a full insurance application may result in you being declined. Or, let’s say your 25 and getting your first mortgage, and the premium for life and disability is under $50/month – that’s a no brainer – it’s extra coverage, it’s way affordable and you lock in that price at your current age so why not? I probably spend that amount a month on Starbucks so ensuring that you’re mortgage payments get made if you’re hurt or your mortgage gets paid out if you die so your loved ones can keep the asset you worked so hard for makes perfect sense. But on the flip side – don’t feel pressured to buy something you don’t understand. Ask for a detailed explanation of the terms and conditions of the coverage and feel free to shop around. If you don’t object to a health questionnaire and (in some cases) a physical then there may be other options more suitable for you.
Term insurance/disability insurance
Like the coverage above, these are products that you can apply for to prepare you for ‘What if’. With term insurance, you can take a set amount (i.e. $500,000 face value) and you pay a set premium for a specific period of time (i.e. $50/month for 10 years of coverage). With disability, it is intended to cover interruptions in your income so that you can continue to make your mortgage payments. Many people say “I already have coverage through work” and while this may be true, most plans only cover 55-60% of your income to an allowable maximum of 70%. So a question to ask yourself is if I only got 60% of my pay-cheque for the next few months to the next few years, could I still make my mortgage payment and meet all of my other expenses?
With life insurance, you’re about to take on probably the biggest debt of your life. It will have a massive impact on your budget and will be an essential part of your family’s daily routine and sense of security. I’ve heard people say " if I die they can just sell the house” but I wonder how many people have really thought hard about that statement, especially if you have children. If you or your spouse were to pass away tomorrow you’d probably have enough on your plate without having to uproot everyone from the family home (not to mention try and find a suitable rental in your neighborhood in this market).
I’m a huge advocate for personal insurance and insurance in general – yes, you’re paying for something that you hope you never have to use but ultimately what you are paying for is peace of mind. I’m not a licensed insurance broker so I can’t speak to all of the available options and solutions, but I strongly recommend that you sit down with one to do an insurance needs assessment. Even if you don’t end up taking coverage at least it gives you a picture of where you are at and where some of the gaps might be.
Questions? Let’s chat.