Mortgage insurance: When the unexpected happens

Disability or illness could pose extreme financial difficulty.

You’ve purchased a lovely home, secured a great mortgage rate and your thoughts are focused on enjoying your investment and seeing it appreciate in value. The last thing on your mind is that something might happen that would affect your ability to pay your mortgage. And hopefully – knock on wood – all goes well.

However, we know the unexpected happens, and one of the keys of financial prudence is to always be prepared. The numbers speak for themselves: one in three people, on average, will be disabled for 90 days or more at least once before they reach 65. Based on current incidence rates, we know 40 per cent of Canadian women and 45 per cent of Canadian men will develop cancer during their lifetimes. And every seven minutes in Canada, someone dies from heart disease or stroke.

Your home is likely the biggest investment you’ll ever make and if you’re unable to make your mortgage payments due to disability or illness, or if you should lose your life, this could pose extreme financial difficulty and even result in the loss of the property. One way to protect yourself and your home is through mortgage life and disability insurance, also known as mortgage insurance. While this product is designed specifically for mortgage default protection, other broad-based insurance products (personal life and disability insurance) are options, so I’ll provide some comparisons and contrasts with these alternatives to help you make an informed decision.

Mortgage insurance provides an important early buffer for those who don’t have sufficient personal life or disability insurance at the time of qualifying for a mortgage. Since you become legally liable for your mortgage from the time subjects are removed, you should consider mortgage insurance even before you take possession of the home to avoid or minimize risk. In most cases, mortgage insurance can easily be obtained at the same time you sign up for your mortgage, ensuring a basic level of coverage to protect yourself and your house.

For those with certain pre-existing medical conditions, mortgage insurance may in fact be the best or only option for protection because it offers a lower qualification threshold, compared to personal life or disability insurance products. Approval is usually subject to a few health questions, whereas personal insurance may require a more exhaustive process. So in situations where personal life and disability insurance is difficult or expensive to secure due to medical reasons, mortgage insurance ensures that you don’t go unprotected.

You should keep in mind that life claims with respect to mortgage insurance pay off the outstanding balance on the mortgage at the time of the claim, while a personal life policy will provide a lump sum payment that can be used for general financial needs. For this reason, mortgage insurance and personal life/disability insurance should ideally be used to complement each other to achieve broad financial protection. Mortgage insurance disability payments will cover your mortgage payments under qualifying circumstances and won’t reduce payments from any private or workplace disability policies you may have in place.

Mortgage insurance is a good first step, but considering the significant financial commitment of purchasing a home, I always recommend a full review of overall insurance needs at this time. Explore the benefits of mortgage and personal life/disability insurance options with your financial institution, based on your particular set of circumstances. Then make sure you have adequate coverage in place to take care of the unexpected.

Kathy McGarrigle is chief operating officer for Coast Capital Savings.

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