The COVID-19 pandemic affected so many aspects of our lives – our health, our jobs and our finances. Many Canadians may have found themselves in more debt since the pandemic began.
According to Statistics Canada, the household debt ratio rose from 175.6% to 176.9% earlier this year. That means Canadians now owe $1.77 for every dollar they have to spend.
A good chunk of that debt includes mortgage debt. Statistics Canada added that mortgage debt was $1,532.3 billion by the end of the first quarter.*
So what can Canadian homeowners do to financially protect themselves and secure their mortgages?
To start, homeowners can get mortgage insurance from a financial institution. Or you can get mortgage protection with life insurance and critical illness insurance from an insurance company.
What is mortgage insurance?
Mortgage insurance works by paying off the outstanding principal balance of your mortgage, up to a certain amount, if you die.
What is mortgage protection?
Mortgage protection, on the other hand, uses a combination of insurance policies to protect you. This includes policies like:
- Term life insurance, which covers you for a set period, such as 10, 15, 20 or 30 years. It can help if you’re looking for low-cost insurance. The premium – that’s the monthly or annual fee you pay for insurance – is usually low for the first term. But the cost may increase when it’s time to renew. Buying coverage for a long enough term to match your mortgage term – 30 years, for example – will keep the cost steady. (Read more: Is term life insurance right for you?)
- Permanent life insurance can be more expensive at first, but it covers you for life. The amount you pay can either stay the same or vary over time, depending on the type of plan you choose. (Read more: Is permanent life insurance right for you?)
- Critical illness insurance gives you a one-time payment if you’re diagnosed with a serious illness that's covered under the policy (and you meet the other policy conditions). You can use the money for medical expenses, to pay off your mortgage or for anything else you wish. It’s up to you. (Read more: Do you need critical illness insurance?)
Mortgage insurance vs. mortgage protection with life insurance and critical illness insurance: What’s the difference?
The main difference with mortgage insurance is that the payment goes to the lender. The amount you’re covered for declines as your mortgage balance declines.
And, depending on how much you put into your down payment, you may also have to get a mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC). Basically, if you want to buy a home with a down payment of less than 20%, you’ll need CMHC mortgage loan insurance. This protects your lender in case you can’t make your payments.
With mortgage protection, however, critical illness insurance gives you a one-time payment you can use for your mortgage or other expenses as you choose. And life insurance pays a tax-free amount to your chosen beneficiary (the person who receives the benefit) when you die. The payment can cover more than just the mortgage. The beneficiary may then use the money for any purpose.
- Basically, mortgage protection insurance helps cover your mortgage payments if you become seriously ill or die unexpectedly. Learn more about it here.
But before you pick between the two, here are some other important differences to keep in mind:
Who gets the money with mortgage insurance?
With mortgage insurance, the money goes to the lender.
With critical illness insurance, the money goes to you. With life insurance, it goes to whomever you name as the beneficiary.
Can you move your mortgage insurance policy?
If you change mortgage providers, your mortgage insurance doesn't automatically move with you. If you move your mortgage to another lender, you’ll have to prove that your health is still good. You’ll also pay the mortgage interest rate the new mortgage provider offers.
With life and critical illness insurance, your policy stays with you even if you transfer your mortgage to another company. There’s no need to re-apply or prove your health is good enough to be insured.
Mortgage insurance or mortgage protection: Which offers more flexibility?
With mortgage insurance through a lender, your needs may change over time. But you don't have the flexibility to change your coverage. With mortgage protection, you can convert term life insurance and term critical illness insurance plans into permanent plans later on.
- When should you buy life insurance?
- What type of life insurance do you need?
- Find out how a serious illness can affect your finances.
Does mortgage insurance coverage decrease over time?
With a lender-offered mortgage insurance plan, the benefit you’re paying for decreases as you pay down your mortgage, but your cost stays the same. If you pay off your mortgage, your coverage is gone.
With life and critical illness insurance policies under mortgage protection, the amount of coverage doesn’t decrease over time, even if you repay your mortgage.
- Get a quote today. Want to apply for your life or critical illness insurance online? You can, with Sun Life Go insurance. Get started here.
*A quarter refers to a three-month period. The first quarter covers the months of January to March. The second quarter covers April to June. The third quarter covers July to September. And, the fourth quarter covers October to December.