What do the policies cover and who do they protect?
When purchasing a property, the term “insurance” comes up a LOT. After the second or third time, the different insurance policies available may start to blend together but it’s good to understand the differences in all the different types of insurance, and it’s especially important to know who the insurance policies protect.
Mortgage Default Insurance (commonly referred to as Mortgage Insurance)
In Canada, Mortgage Default Insurance is required federally if a Buyer has a down payment of less than 20% of the purchase price of the home. This insurance protects the Lender in case of default by guaranteeing the full amount of the mortgage. It also allows Borrowers with limited savings to purchase a home sooner. This insurance premium can be paid in a lump sum at closing or, more commonly, blended in with your mortgage loan payments. The premium decreases with the more down payment you have.
Title Insurance
Many Lenders are now requiring that buyers purchase Title Insurance, which transfers risks related to title (ie: title fraud, un-discharged liens, encroachments, zoning issues, property tax arrears, survey problems, etc) from the homebuyer to the Title Insurance Provider. There are actually TWO types of Title Insurance:
1. Homeowner Policies – Protects the Homeowner (you), lasts as long as you own the property, and is priced based on the value of your property.
2. Lender Policies – Protects the Lender’s interest in your mortgage, lasts as long as you have your mortgage, and is priced based on the size of your mortgage.
Basically, Homeowner Policies protects you against claims about rightful ownership of a piece of property and Lender Policies protect the Lender to ensure the enforceability of the Title.
Mortgage Life/Disability Insurance
All Mortgage lenders in Canada are required to offer mortgage life and disability insurance. Premiums on Mortgage Life Insurance stay the same throughout the lifetime of your mortgage but the payout, if there is one, decreases with the mortgage. In the event of your demise, all funds are directed to your Lender to cover any remaining mortgage balance only. With the Mortgage Disability Insurance, if you become disabled and qualifies for benefits, monthly payments will be made directly to your Lender on your behalf. The amount paid is based on our actual mortgage payment at the time of your claim. This is not mandatory coverage. You can choose to apply or waive.
Life/Disability Insurance
Insurance providers offer other options to protect you and your family from your mortgage debt. Most commonly, they offer term and life and disability insurance. With Term Life Insurance, the payout, if there is one, never changes. Funds are released directly to your Estate and any remaining mortgage balance can be paid out by your Executor. If you have an existing policy, coverage can be increased to include your mortgage debt. Disability Insurance provides you coverage should an accident or disease prevent you from working. Depending on the type of policy you purchased, you should receive a monthly payout that will be enough to cover your monthly bills, including mortgage payments. (NOTE: When calculating what coverage you may need, keep in mind that payments from private disability insurance providers are tax-free whereas the payout from most corporate plans is taxable.)
Fire/Home Insurance
Fire/Home Insurance protects you, the Homeowner, against loss of use of your home or the personal belongings contained in your home due to fire or other accidents. It also gives your Lender the protection they need against the risks to your property that could compromise its value. Unless you pay cash for your home, proof of Fire Insurance must always be provided before closing to the lawyer so he/she can verify that the Lender has been noted as the first loss payable.
Source: e-Newsletter from Eva Neufeld, mortgage advisor with Mortgage Tailors
