Buying a property is a major financial commitment. A death, disability, or serious illness can affect your ability to keep up with mortgage payments.
Individual insurance can provide financial protection in these situations. Depending on the policy, this may include life insurance, disability insurance, or critical illness insurance. These types of coverage can be purchased separately or combined into one policy.
In this guide, the term "mortgage insurance" refers to these individual insurance products when they're used to protect against financial difficulties related to a mortgage.
How Does Individual Insurance Work to Protect Your Mortgage?
Imagine a couple who owns a home with a remaining mortgage balance of $350,000.
One partner has an individual life insurance policy worth $350,000. If that person passes away while the policy is active, the insurer may pay that amount to the designated beneficiary, provided the policy conditions are met. The money could then be used to pay off the mortgage.
If that person also has disability insurance, they may receive benefits during a covered period when they're unable to work, helping them keep up with their financial obligations.
Critical illness insurance, on the other hand, may provide a lump-sum payment following the diagnosis of a covered illness, such as certain types of cancer, a heart attack, or a stroke, depending on the policy's definitions and conditions.
Each type of insurance covers different situations, and none automatically guarantees that the entire mortgage will be paid off.
What Are the Main Features of Individual Insurance?
One of the main features of individual insurance is the ability to choose the type and amount of coverage, depending on the insurance product and eligibility requirements.
Life insurance generally provides a payout when the insured person passes away. Depending on the policy, the coverage amount may stay the same or decrease over time. Term life insurance can provide coverage for a specific period, such as 10, 20, or 25 years.
Disability insurance generally provides regular payments if a covered illness or injury prevents the insured person from working. Benefits depend on factors such as how disability is defined in the policy, the waiting period, the maximum benefit period, and any exclusions.
Critical illness insurance generally provides a lump-sum payment if you're diagnosed with a covered illness and meet the policy conditions. The number of illnesses covered and the payment terms vary by product.
Some individual insurance policies also allow you to name a beneficiary who will receive the death benefit. Unless special arrangements apply, such as naming the lender as a beneficiary or assigning the policy to the lender, the beneficiary can use the money according to their needs.
Depending on the policy, coverage may also remain active if you change lenders, refinance your mortgage, or sell your property. This means it isn't necessarily tied to one specific mortgage.
How Much Does Individual Mortgage Insurance Cost?
The cost mainly depends on the type of coverage, the insured amount, your age, health, smoking status, and the length of the policy.
For example, term life insurance may offer fixed premiums for a set period. Other policies have premiums that change at renewal or vary according to the policy terms.
Disability and critical illness insurance have their own pricing criteria. The benefit amount, additional coverage options, applicable waiting periods, and exclusions can all affect the cost.
There is no single monthly premium for individual insurance used to protect a mortgage. Two people with similar mortgage balances may pay different amounts depending on their personal profiles and the coverage they choose.
What Are the Eligibility Requirements?
Eligibility depends on each insurer's requirements and the type of coverage you're applying for.
The application process may include questions about your health, medical history, and lifestyle. In some cases, additional medical information or tests may be required.
For disability insurance, your occupation, income, and employment situation may also affect your eligibility and the benefits available to you.
Having a pre-existing medical condition doesn't automatically mean your application will be declined. Depending on the situation, the insurer may approve your application under standard conditions, offer a different premium, apply certain exclusions, or decline coverage.
Age limits, waiting periods, exclusions, and claim requirements vary from one policy to another.
How Is Individual Insurance Different From Insurance Offered by a Financial Institution?
Banks and other financial institutions may offer insurance directly linked to your mortgage. Depending on the coverage you choose, this insurance may provide protection in the event of death, disability, or certain critical illnesses.
The main difference is how the policy works and how benefits are paid.
With insurance linked to a mortgage loan, the lender generally receives eligible benefits to reduce the outstanding mortgage balance or cover certain payments. The insured amount may decrease as the mortgage is paid down.
With individual insurance, the coverage amount is determined by the terms of your policy. For life insurance, the amount may remain fixed throughout the coverage period, and the benefit is paid to your designated beneficiary unless special arrangements have been made in favour of the lender.
Individual insurance may also remain active if you switch financial institutions, while insurance tied directly to your mortgage may end when the loan is paid off or transferred.
The two types of insurance may also differ in their premiums, medical requirements, exclusions, beneficiaries, and claim procedures.
These features vary by product and don't necessarily apply to every policy.
Is Mortgage Insurance Mandatory, and Can You Cancel It?
In Quebec, purchasing life insurance, disability insurance, or critical illness insurance offered by a financial institution is not automatically required to get a mortgage.
However, a lender may require certain insurance coverage to secure the repayment of the loan. The lender cannot force you to purchase a specific insurance product or require you to use its preferred insurer.
Individual insurance can generally be cancelled according to the terms of your policy. Cancellation conditions, any available cash surrender value, and potential financial consequences depend on the product you've purchased.
If your insurance is being used to meet a lender's requirement, cancelling it may affect your ability to meet the conditions of your mortgage agreement.
Individual insurance used to protect a mortgage is different from mortgage default insurance, which protects the lender against certain risks if the borrower fails to repay the loan. Mortgage default insurance is a separate type of coverage.
